Why a Dollar Rally Will Never Last Long? By Shan Saeed
The bull market in the U.S. dollar is like an Invisible Man. Its quite funny when people talk about currencies without executing or performing their preparation on the subject.
An important aspect of any bull market is psychology. Bull markets climb a wall of worry, or so they say. This means that the market will continue to climb despite all of the worries surrounding the bull market.
Let analyze history and find some facts. For example, from 1982 to 2000, when the Dow Jones Industrial Average soared from 777 to above 11,000, there were all sorts of worries. Inflation pressures, the collapsed of the Eastern Bloc, the S&L crisis, the Mexican peso crisis, the Long Term Capital collapse in 1998.
Throughout all of these crises and collapses, equity prices kept climbing. If you read the book "The Great Super Cycle by David Skarica'....I analyzed why its true. One of the reasons is that markets take on a life of their own. These major cycles run 15 years to 20 years and they go on despite wars, recessions, drought, etc.
The same goes for downward cycles. Despite all of the reasons to buy the dollar in recent years — such as the financial crisis of 2008 which caused a flight to the dollar and the euro crisis of 2010 — the dollar has continued on its long-term downward trend.
However, I'm hearing more calls for a dollar rally. People are talking about reasons the dollar will rally, such as the Middle East crisis will cause another flight to safety in the dollar.
I hear that the U.S. economy will grow faster [ GDP 3%] in the short term due to the tax cuts of late 2010. Some say that the euro crisis will show its ugly head again. However, with so many calls for a dollar rally, I think this means the dollar will continue on its downward trend. Dollar will lose 9-10% against major basket of currencies. There are just too many people looking for a dollar rally.
In addition, we must remember three points about the dollar at the moment:
1• The U.S. is running a near-10 percent of GDP deficit, which is higher than every other Western government in fiscal 2011. Higher than Great Britain. Higher than Spain. Higher than Portugal. Yes, even higher than Greece, if its austerity measures pay off. These deficits are putting the U.S. in danger of losing its reserve-dollar status.
2• As George Soros pointed out recently, the euro crisis is all but over with the recent austerity and bailout measures being passed. The crisis this year is in local municipalities and states in the United States. It requires $127 billion to rescue the failed states in USA. They are acting like Greece....California, Illinois, Michigan, Wisconsin are all in red & in bad shape....This will put further pressure on the U.S. dollar in 2011.
3• If the Middle East crisis spreads[ Saudi Arabia is a bombshell], oil prices will continue to spike [ might touch $137/barrel this year]. My prediction of $$117/barrel already hit the market. The U.S. is much more reliant on the automobile and low oil prices than other Western nations. European nations have much better public transportation and train systems. Therefore, higher oil prices will pressure the U.S. more than Europe.
Therefore, other than small rallies upward, I expect that the dollar is going to continue its bear market [9-10% down in 2011] and continue to move lower against other major world currencies.
Disclaimer...This is just a research piece and not an investment advice. Investors are strongly encouraged to execute their own due diligence before making any investment decision or strategy execution.