I’m Hearing Bull From Dollar Bears
by Alexander Green, Chief Investment Strategist
Monday, March 29, 2010: Issue #1226
Our Investment U Conference in San Diego two weeks ago was dedicated entirely to contrarian investment ideas. Yet, astonishingly, I was the only speaker among a flurry of “currency experts” to take a bullish stance on the dollar.
Of course, genuine contrarianism – by definition – is a lonely business. But why am I bullish?
Let me count the ways…
- Dollar sentiment – as it is near virtually every market bottom – is way too pessimistic.
- The multitude of problems besetting the United States are fully reflected in the price of the greenback. No one is going to sell the dollar next week because of the budget deficit.
- Economic conditions in overseas markets – especially in Japan and the Eurozone – are even worse than they are here.
- The euro faces serious structural problems as bankers in Frankfurt dictate monetary policy to weaker economies like Greece, Spain, Portugal, Italy and Ireland. (Expect social unrest – and demands to punt the euro – to grow.)
- The dollar will retain its supremacy as a safe-haven currency if the world economy starts to sputter.
- The U.S. currency has already turned up from its December lows, rising nearly 10% against the struggling euro.
- And lastly, Ben Bernanke is likely to start raising rates later this year, attracting greater foreign investment.
Given this scenario, why are so many analysts still bearish on the dollar?
Putting Dollar Bearishness in Perspective
One reason is that the dollar has fallen for so long. Pull up a chart of the greenback over the past decade and it bears an uncanny resemblance to a drunk falling down a flight of stairs. Every time it tries to get up, it tumbles again.
But 10 years is not forever and all market trends eventually come to an end. Go back and look at what the dollar did in the 1990s. When it gets up a head of steam, it can appreciate strongly, greatly diminishing the value of foreign currency assets.
Another reason that so-called experts are down on the dollar is they are rightly upset about the direction of the United States as a nation. With more than $100 trillion in unfunded liabilities for Social Security, Medicare and the new prescription drug benefit, things look pretty ugly out there.
But, amazingly, the situation is even worse in other countries. For instance, U.S. debt is now approximately 65% of GDP. But Japan is far worse. It’s expected to hit 200% of GDP this year. And can you really believe that countries like France and Belgium are models of fiscal responsibility?
Lastly, you have to note that many currency pontificators make their living offering products that allow Americans to diversify outside the dollar. Asking these folks whether they’re bearish on the dollar is like asking the Army Corp. of Engineers if a river needs a bridge.
As I’ve noted before, there is no good reason to sell your international stocks. Equities can easily appreciate enough to outstrip a negative move in the currency.
But foreign bonds and bank accounts will get a haircut if the dollar continues to rise.
My advice? Govern your portfolio accordingly.
Good investing,
Alexander Green
Related Investment U Articles:
- There Goes the Euro… Again: Why the U.S. Dollar is Set to Rebound Against Europe’s Single Currency
- The Swiss Franc Trumps Both the Dollar and Euro
- The PIIGS Are Getting Sloppier… Here’s How to Clean Up
- Why Things Are Looking “UUP” for the Dollar
- The Best Dollar Investment on Earth
7 Responses to “I’m Hearing Bull From Dollar Bears”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
How about the Canadian dollar? Should a Canadian stay out of betting on the US dollar as the Canadian economy looks relatively strong and the government is even more likely than the US to raise rates sooner rather than later.
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Bill,
The US$ is actually in the middle of a bull run, and should continue making gains throughout the year according to our experts. Even though the Canadian economy does look much stronger than its southern neighbor right now, most countries and investors around the world consider the US$ “safe” compared to other struggling economies and currencies.
Thank you,
Investment U
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200%!!! Please don’t tell that to the current US administration…it will only give them license to spend more, and more. and…
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I disagree with you partially about the US dollar. I do believe the dollar will rise soon as the result of a correction in the market. How long that wil last is unknown yet. If the market endures a summer correction and returns to business as usual before the end of the year I expect the dollar to turn down again then.
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The Euro is about to gain in value once again over the next few months.
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If Japan’s economy is in such bad shape, and it sounds like not much hope of improving, why do you feel Japanese stocks are a good contrarian investment?
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Tim,
The very definition of contrarian means going against the common way of thinking. Right now, investors are overwhelmingly against Japanese businesses and that has made them severely undervalued across the board. Chances are good that they’ll outperform expectations.
Thank you,
Investment U
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