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Why the Dollar Will Soar in 2010
by Alexander Green, Chief Investment Strategist
Monday, December 14, 2009: Issue #1157
We all know why the dollar is in the cellar right now. We also know why it’s expected to continue right through to the basement floor:
- Massive budget and trade deficits.
- Ultra-low interest rates. (Zero on the short end.)
- $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid.
- Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U.S. economy.
There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Here’s why…
Two Reasons for a Dollar Rebound
There are two main forces that could drive the dollar higher:
- All the problems mentioned above are already well recognized and priced into the greenback.
- Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldn’t imagine Internet stocks doing anything but soaring higher. Five years ago, they couldn’t imagine real estate doing anything but barreling down the same one-way street. Record lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down.
When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point – and an opportunity. This is no exception.
Commentators seem to forget that all currency values are contingent. You can’t just look at fundamentals in the United States. You have to look at them abroad, too.
And there isn’t much out there right now that’s terribly positive…
America’s Fellow Heavyweights Have Problems, Too
Take Europe, for example…
- Eurozone: In the third quarter, the 16-nation Eurozone grew at a 1.5% annual rate. The U.S economy, by comparison, grew at 3.5%. European consumers and most business sectors are still feeling the pain from the deepest recession since the 1930s. The continent is likely to be the weakest region for global expansion next year, according to Julian Callow, Chief European Economist at Barclays Capital in London.
- United Kingdom: This is no bastion of strength, either. Europe’s biggest economy outside the Eurozone is still in recession, due to overly indebted British households and tight credit. British GDP contracted at an annualized 1.6% in the third quarter.
- Japan: The world’s second-largest economy has its own problems, too. At 172% of GDP, Japan’s government debt is by far the largest among rich nations. What’s more, it’s expected to reach 200% next year – and hit 300% within a decade. Rising social security costs and the weak economy are the primary culprits.
The new government there is trying to prevent a double-dip recession by spending even more. But with government debt soaring to records, talk of new stimulus measures is already pushing up long-term rates and threatening to curtail the impact of fresh spending.
Bet on the Dollar in 2010
Recognize that Europe and Japan are hardly experiencing heady economic growth and great fiscal probity. Most are bogged down economically and running fiscal deficits as bad as ours.
And personally, when the whole world is in this big a mess, I’ll take the greenback over the euro, the pound, or the yen. My bet is in 2010, so will most world currency investors.
Virtually no one is expecting it, but the dollar is likely to climb 20% against the euro and the pound next year and 15% against the yen.
Hedging is fine, of course. But if you have too much exposure to foreign-currency denominated bonds, CDs, or bank accounts, rein it in.
Good investing,
Alexander Green
Editor’s Note: Have you ever looked at an index, stock, or currency make a huge move in one direction and wondered how you can take advantage of the momentum without getting burned? Many investors blindly follow the herd, unaware of the best times to buy and sell, while others watch the moves with envy, wishing they’d capitalized on them.
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- Why It’s “Mayday” For the Euro… And What You Should Do
- How to Play Rising Foreign Stocks and a Rising Dollar
- Enough Dra(ch)ma: The Euro Will Thrive… When PIIGS Fly!
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35 Responses to “Why the Dollar Will Soar in 2010”
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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December 14th, 2009 at 4:00 pm
Hi Mr. Green – for some reason you didn’t mention the currency of America’s largest trading partner, Canada? (Unless all that nice discount drywall and bargain basement baby food from China has pushed us into second place recently!!) Our fiscal and monetary fundamentals seem to be in better shape than most others out there. How do you see the Canadian/US dollar relationship over the next while? Thanks. STEVE
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Gennaro Di Marzio Reply:
January 19th, 2010 at 11:45 am
Has anyone responded to Steve’s query?
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Steven Coe Reply:
January 20th, 2010 at 11:10 am
Not yet!! Thanks. STEVE
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Investment U Reply:
January 20th, 2010 at 2:40 pm
Steve,
The US$ might very well beat out the Canadian dollar in 2010, but Canada has a stronger financial system and abundant natural resources to fall back on in the end, and its currency should trump ours over the long term.
Good investing,
Investment U
December 14th, 2009 at 4:05 pm
If you think the $ is going up to anywhere that you predict, you are a fool. I agree with getting out of CD’s and forex.
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R.M.Stanchak Reply:
December 14th, 2009 at 4:44 pm
Alex,
Does your 2010 dollar bull position mean you are gold bearish next year?
Regards.
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December 14th, 2009 at 4:32 pm
Alex,
I’m assuming that you’re bull dollar call in 2010 indicates that you are gold bearish in 2010.Is that correct?
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December 14th, 2009 at 5:13 pm
It would be helpful if your outlook addressed the impact on commodities, particularly oil and gold, and the commodity currencies. Can these escape the usual inverse relationship to the US Dollar/
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December 14th, 2009 at 5:26 pm
Please show me this guru’s annual performance over the past 5 years.
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December 14th, 2009 at 5:52 pm
Interesting, but why no mention of China?THE economy with a substantial surplus instead of debt? do you see the $ strengthening against the Yuan too? what about Brazil?
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December 14th, 2009 at 7:20 pm
I agree with Frank. It might also be helpful to discuss the symbiotic relationship between the Chinese Yuan and the US Dollar. Also, in reference to your article, China has now overtaken Japan as the second largest economy globally.
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December 14th, 2009 at 9:04 pm
I think you are losing it if you think the dollar will go up in 2010, It has only one way to go, What’s the opposite of up You guessed it. DOWN Gold and silver will be going up with Obama in Control. You will lose a lot of clients if you put them into dollar dominated investments
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December 14th, 2009 at 9:45 pm
Alexander,
Will you add gold in the context of your article? I appreciate the relevance of comparing the dollar to other currencies, but what are your thoughts regarding the dollar and gold?
Thanks,
Dean
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December 15th, 2009 at 1:42 am
what about the USD against the IQD )Iraqi Dinar)?
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December 15th, 2009 at 4:03 am
Would like to know your verifiable track record for 2009 and 2008. From what I have read many advisory letters are dream makers chasing subscription money, not real money makers for their subscribers. Seen too much hype in Investment U recommendations.
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December 15th, 2009 at 9:10 am
“And there isn’t much out there right now that’s terribly positive…”
Isn’t there? Aside from Canada, look at one of the other top traded currencies: Australia. High growth, high GDP, what’s not to like?
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December 15th, 2009 at 6:40 pm
Love to know how that affects gold and gold mining stocks. Doesn’t help me plan on what to do there.
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December 15th, 2009 at 6:45 pm
A very interesting article. To be blunt, the euro never made much sense to me to begin with. It is a creation of a lot of stupid politicians with the few strong countries carrying the many weak. Canada is in better fiscal shape then most nations out there because its federal government manages to wiggle its way out of obligations to its provinces and it taxes its citizens to death. Its saving grace is its natural resources but its a mystery to me that it hasn’t folded under the enormous tax burden imposed on its citizens. One other thing that may lift the US dollar is a decline in the stock markets, since the 2 seem to be inversely correlated and down these stock markets will go in the second half of 2010.
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Roger M Reply:
December 20th, 2009 at 12:17 pm
It is true that Canadians pay more income taxes than Americans (for the time being that is…. just wait to see what will happen to your tax rates in the next few years)
HOWEVER, Canadians do not have to pay $10,000+ per year for health and medical insurance, it’s already in the taxes, tuition fees are much lower than yours, the child car system is much more developped in Canada and costs as little as $7.00 per day (including lunch)in Quebec, electricity rates are much lower than in the US and the list goes on…..
Canadians pay more (for now) but we get much more. furthermore, the value of our dollar is going up … not down.
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firts Reply:
January 30th, 2010 at 5:41 pm
What free health care?
The cost of your health care is deducted from paychecks and mostly as a cost to your employers. Taxes are separate.
Any one purchasing catastrophic heath insurance pays less than most Canadians. Insurance is for something that we could not other wise pay or that would cause serious financial stress. Any thing else is an invitation for abuse and makes prices go up.
If you can afford a few beers you need not worry about the cost of going to the doctor for the common cold. What makes the prices go up is the fact that to many people buy insurance for what should not be insured. No one looks at the cost its free so if its free the real cost goes up and so will the premium. If it’s free and the cost does not go up you will have restrictions and waiting lines like in Canada.
Try phoning a Hospital in Canada, good luck with the answering machines.In Canada the cost is measured in time,cancellations and neglect.
It’s as simple as this: Look at any medical procedures in the last 5 years that are not insured and watch prices go down.
No insured person knows the cost, no one even ask.
If non-catastrophic insurance would stop being offered cost would crash immediately and people could use the premium saving to pay tax-deductible small medical bills.
Insurance is not insurance anymore its a subscription to health care.
I pay about $100 per month not $10,000+ per year for health and medical insurance. That leaves a lot of cash to pay for the little uninsured things that we may get from time to time.
The Canadian Dollar should be stable as long as we drive cars that need oil.But its purchasing power at this time is a bit out of it vs the US. Also you do have a good Leader thats is rare.
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December 17th, 2009 at 5:08 pm
i to belive the dollar will go up for the same insane resaons.when evey thing is broke you take what works the best.the us is the only country with the power to change rapidly and the fed&banks will make it happen they are already on track for it to fall into place.they will not show there hand until they have to and if they even hinted at what they intend to do the market would swing wildly. you have to look beyond the lights and cameras to see the show.
thank you
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Chuck Bilbe Reply:
December 20th, 2009 at 10:02 am
Gold will soar to at least $2,400 and the U.S. Dollar will take a big dive, even when the stock market falls in later 2010!
As quoted from The Market Oracle at: http://www.marketoracle.co.uk/Article15513.html
The corrupted COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle. In an open manner, no longer hidden from view, the COMEX is settling gold long futures contracts with Street Tracks GLD shares. Investors in GLD shares should be horrified at shareholder contamination. Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May.
The two-sided fraud deserves mention once more. In time, the Street Tracks GLD (run by State Street, with JPMorgan as custodian) will be exposed as totally corrupt. They are using GLD shares openly now to cover COMEX short futures contracts. They are likely providing GLD bullion to London to satisfy futures contract delivery demands. Evidence painted a picture after London gold delivery stresses occurred at the same time as vast deletions from the GLD bar list, which suddenly reappeared days later. That is burning the candle at both ends of the GLD itself. Eventually my expectation is for GLD shares to sell at a 40% discount to gold price as the lack of gold inventory is revealed. Then later, after lawsuits, the GLD might easily sell at 80% discount. Finally the climax could be prosecution for fraud and all investors will be given 20 cents per dollar versus gold. Who knows? Maybe it will be 30% and 60% and 40 cents per dollar. The trouble for hapless unsuspecting investors is they did not read the prospectus, which permits such misuse of GLD shares. They just might be lazy and qualified sheeple. The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history.
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December 18th, 2009 at 10:44 am
To me this article make a lot sence, most firms are talking not for the dollar, but I believe it will rally sometime soon. The problem I have is I do not know how to place this order, what to tell my broker. Do your firm offer this service, please help me if you can. I think you have an excellant research team.
Thank you, Happy Xmas days
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December 20th, 2009 at 7:34 am
Ben Bezerchie gets man of the year. He is going to mop up liquidity in the dollar.He will defend the dollar. What is good for the Fed Reserve is good for USA.Dont fight the Fed. dollar going up!!!!
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December 20th, 2009 at 10:03 am
Many of you are so convinced of your beliefs, you’re bound to get suprised and it won’t be the suprise you expect. Almost nothing in the markets follows our script for it. Regarding currencies, everything is relative as Alex said up front. The dollar is fundamentally in terrible shape, but so too are other major fiat currencies for same reasons. Commodity currencies are strong now but will falter if commodities weaken under a stronger dollar (whether that strength is temporary or more long lived) and even if they didn’t, those economies are too small to absorb excessive new capital inflows. Chinese Yuan is pegged to the dollar so, no place to go there. That leaves the dollar, hated, shorted to death and in an uptrend. For all you gold-bugs stocking your bunkers in your back yards, you’d do well to consider that the suprise we get is not the one you planned for.
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December 20th, 2009 at 3:26 pm
It will bounce but utlimately fall again.
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Freebirdshu Reply:
December 22nd, 2009 at 1:40 pm
absolutely correct, for a long future…
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December 21st, 2009 at 5:37 am
Yes may be when Fed increase the interest rates Dollar has to appreciate.
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bob Reply:
January 4th, 2010 at 7:58 pm
thus inflation lots of it !!! gold will soar central banks will be heavy in cash long or short they now control the gold prices
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December 21st, 2009 at 3:45 pm
Everybody PLEASE REMEMBER one thing:
Do you know how much US DOLLAR each American owe FOREIGN COUNTRIES?? for example, IF China goverment hadn’t kindly keep U.S bond/dollar reserve, and would get angry about OBM’s selfishness, then start DUMPING U.S bonds, the U.S dollar market should crash immediately, at that time if you realize to try to get some gold, there would be very little chance, man.
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January 5th, 2010 at 8:23 am
My friend who is a Christian says that the bible foretells the fall of the US and UK, in terms of their economies and global influence, and the rise of Germany (well, you can throw in China, India, Russia and others). At this stage, China and the Arab (oil exporting) countries are trying very hard to find ways to use another currency (or a basket of currencies) as a global currency to replace the ailing US dollar.
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Joshua Reply:
March 8th, 2010 at 6:22 pm
Adam (Aussie) I am sure you would like to see the UK/US decline mate! But since we have an economy only Australians can dream of better not to take advice from a Jehovas Witness.
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Adam Reply:
March 9th, 2010 at 11:00 am
Thanks for your comment mate… Sure I would love to see the UK/USA currency decline against the Aussie dollar… makes it much cheaper for a holiday in those countries. However, I would definitely not like to see the economies of UK/USA decline. I would like UK/USA super strong and the US continue to be the only superpower in the world. Hey mate, we are fearful of China’s rise in military power. The free world needs a super strong USA!!!
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February 23rd, 2010 at 3:36 pm
The definition of “inflation” at least in older dictionarys, is “an increase in the supply of money or credit”. Today there is a massive increase in the money supply via the printing press and without an equal amount of an increase in productivity. Productivity is declining in America, therefore we will have massive inflation. Gold and silver are real money, in fact it is international money and can be spent almost anywhere. Paper dollars are promissory notes backed up by more paper notes and not accepted in many countries. Gold and silver are not used to necessarily make money, but used to protect the value of money. Our individual goal today should more to protect our money rather than make money. If our dollar follows the old German mark, then the wheelbarrow full of dollars may be worth less than the wheelbarrow. I think Yellow gold and black gold have a silver lining. Something to think about. Anson
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March 8th, 2010 at 6:16 pm
I hold more dollars than gold/silver, but since no-one knows for sure, better to hedge and protect. If you protect your money and the value of real estate/stocks/paper/paper over paper go down its a win win situation! At the moment there is no currency to replace the USD, it will SPIKE! Economies evolve, China has a lot to learn! They are heading for the PIIGS SWILL, either this year or next, just look what happened to Japan! DOLLAR up up wake-up people. US are smart and well ahead of the curve, the price has already been discounted, just read between the lines. EURO down, Pound down, Yen has to go down (that may mean govt intervention)- look at the SWISSY), only in 2005 gold/dollar rallied in sinc.
Asia is rallying for now, the power will return to the West soon, why? corruption in China! When we talk about currencies going up/down, can we explain against which currency pairs please. Since that is how the markets interpret price rises in the REAL WORLD!
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