Is the Dollar Coming Back?

The dollar has been beaten up over the last couple of years and now has made a modest jump? Will it continue?

If you read my articles then you know I subscribe firmly to the buy low, sell high point of view.  When oil reaches ridiculous values, it's time to sell.  When banks are beaten down to a pulp, it's time to buy.  Forget consumer or professional analyst sentiment because people feel the worst at the very bottom of a trend.  When you feel like the pain is unbearable and can't ever get better, things are getting interesting.

So, when a friend of mine went to Norway two months ago and reported that a dinner for him and his wife cost over $60, I thought that maybe something was about to happen.

And so it seems to be.

The dollar has gained almost 4% since hitting a low against the Euro last month.   That's not really saying very much.  The dollar is still significantly below its year ago level and it looks even worse going back 5 years.

Yet, there is reason to be optimistic and think we have hit a bottom.

"Weaker global economic growth will undermine commodity prices for the foreseeable future," wrote Stefane Marion, an assistant chief economist with National Bank Financial in Montreal yesterday after the Fed meeting.

Marion continued to say that the dollar "will normally thrive during a correction in commodity prices" and that this decline, "combined with waning pessimism about U.S. financials... should renew investor's interest for U.S. assets that have been severely depressed."

So, money will flow out of commodities and into US dollars and dollar assets?  Could happen.  Remember, buy low.

The second reason is that slowing economies worldwide will prevent central banks from raising interest rates and may indeed force them to drop rates.  ECB President, Jean-Claude Trichet, who has been a super-hawk on inflation recently softened his stance and when the growth numbers from Europe come in looking horrid, he's going to back off even more. 

When he does, watch the dollar rise.

Is this all guaranteed?  No.  But it's safe to bet that a meal from McDonald's will never (in the next 10 years) get to $100 for two.  As a result, I think we're close to a bottom for the dollar.  Everything else is just a detail that will determine timing. 

Buy low, sell high.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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