Tuesday, November 10, 2009

Top 5 Reasons Why The US Dollar Will Continue To Drop

The recent near collapse of the US Dollar has investors wondering when the reversal will finally happen. There was a complete lack of any support coming from the G20 meeting last weekend.

Cathy Liem, Director of Currency Research, GFT, has these 5 top reasons why the USD will continue to drop:

1. Dollar Carry Trade Is Overused but not Overplayed

She says that the primary reason for the wekness of the dollar is because of the overused term dollar carry trade. "Although it is overused it is not overplayed because we have long said that how the dollar performs will depend upon where the Federal Reserve stands compared to the rest of their peers".

Cathy says the fed is very happy with the way thigns are right now. The banks are also happy as they make a killing on money they borrow at zero rates. The Fed gets to say that they are not providing the banks any additional "funding". Right...

She also says that Australia, the Eurozone and even Japan are much more likely to continue "deloosening" monetary policy.

2. Continued Stimulus Pledged by the G20

The G20 continues to pledge additional stimulus, causing the USD to sink. Clearly this is what happened this week so far, with the big increase in gold and on the stock markets on Monday. All due to a lower USD, cheaper dollars, not higher values. Please see the chart of the SPX in other currencies, which we track live here:

Americans think that the markets have gone up this year. They haven't in other currencies. it is just the USD that has lost its value. becuase there is deflation in the US, the fed can get away with it.

"More stimulus is positive for the equity markets which in turn has helped to lift the EUR/USD and other risk trades. Over the past 2 years, there has been an 80 percent correlation between the S&P 500 and the EUR/USD. As long as members of the G20 are not paring back stimulus, high yielding currencies should outperform the U.S. dollar".

3. Geithner Avoids Talking About the Dollar

Did you hear him say anything last weekend? Not even Tim Geithner was talking about the U.S. dollar at the G20 meeting. Usualy he doe snot miss a chance to talk about the "U.S.' strong dollar policy" (!!) . "... his failure to do so may be more than just a careless mistake particularly in an audience of countries who hold massive dollar reserves and are fidgeting about the continued weakness of the U.S. dollar.It is no secret that the U.S. only pays lip service to its strong dollar policy. In a low inflation environment such as today, a weak dollar helps more than it hurts the U.S. economy.

4. The Economy

The economic environment continues to be very tough in the U.S. "Unless the U.S. labor market turns around, the impressive GDP growth that we saw in the third quarter may not be sustained".

5. Little Technicals Support

Ms. Liem also say that there is little technical support underneath the dollar. "Taking a look at the dollar index, 74.93 is the 14 month low and the index is trading just above that. If this level is broken, the next major point of support is not until 71.50. For the EUR/USD a break above 1.5060 opens the door for a move towards 1.55 and for USD/JPY support is at 87. Futures trades have also trimmed their bets on dollar weakness which means that a break of support levels could encourage a wave of new short dollar positions".

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