World Currency Watch: FOREX Market, FOREX Trading BLOG

What to Do When the Entire World Is Bearish on the Buck

I find it interesting (and a bit disturbing) that once again the dollar’s decline is on everyone’s radar.

“Investors at all levels, from retail investors to central banks, are really diversifying their portfolios,” Bloomberg reported this morning.

In other words, everyone from central bankers down to Mom and Pop investors are dumping dollars and buying gold and other currencies instead.

You’ll hear similar stories on CNN, CNBC, and MSN Money. Everyone is talking about gold’s record jump overnight to $1,133, silver’s leap above $18 and how the dollar fell to a 15-month low last week.

Here’s what they won’t tell you: The falling dollar isn’t really breaking news.

In fact, the dollar has been sinking for the better part of the last century (since the Federal Reserve was created in 1913 if you want to get technical).

A bit more recent: The dollar has been in a serious freefall for the past decade – dropping an astounding 37% just since 2001. And that’s INCLUDING the dollar rally that began in July 2008 and lasted until March.

The only difference now? With gold and silver soaring to new highs, the record Treasury issuance, and the Fed continuing to print dollars at an unprecedented rate, even the average American waltzing down Main Street is starting to notice the dollar’s decline.

More importantly, they’re looking for places to hide. (More on that in a moment…)…

Still a Cause for Concern on the Dollar

Now should you be concerned about all this negative dollar publicity? Absolutely.

It means that more U.S.-based investors are finally catching on that the dollar is heading for its ultimate demise. It also means that fewer countries around the world want to hold dollars in their long-term reserves.

That’s bad news for anyone who has their retirement plan, savings account, stock portfolio or other assets denominated in dollars.

Just last week, my colleague Ashish Advani told you how several countries around the world have been diversifying their holdings.

The Reserve Bank of India just bought $6.7 billion dollars worth of gold for their reserves. That was the largest open purchase of gold bullion in 30 years. To make matters even more desperate, they paid for their gold in Special Drawing Rights (SDRs), an artificial mix of the dollar, euro, yen and pound, instead of just dollars – another huge slight to the dollar.

Meanwhile, leaders from the rest of the BRIC nations have been uniting to ask for a new World Reserve Currency. They’ve been bashing the U.S. for our massive debts and our floundering currency all year. Just last week, the Chinese Premier Wen Jiabao publicly announced the dollar’s shortcomings at a news conference in Egypt….

“I hope that as the largest economy in the world and an issuing country of a major reserve currency, the United States will effectively discharge its responsibilities. Most importantly, we hope the United States will keep an appropriate size to its deficit so that there will be basic stability in the exchange rate.”

In other words, he’s calling the U.S. out for our $12 trillion in debt, sinking world reserve currency and record budget deficits that Chuck Butler told you about last week.

And all this negative publicity couldn’t have come at a worse time. The Federal Reserve has to continue to print extra cash to stimulate the entire economy. The Fed is also responsible for buying up whatever Treasuries don’t sell – that means more trips to the printing presses for more new dollars.

With All This Negative Dollar Publicity, Is
Now a Good Time to Sell Dollars?

Now for the important questions: What do you do about all this bad news for the dollar? Where can you possibly hide when everyone is dumping U.S. dollars?

Well, I can tell you a bunch of readers have been asking recently if now is the best time to start diversifying your dollar holdings.

After all, with all this negative dollar publicity, we could very well see a short-term dollar rally coming at the beginning of 2010 as the dollar becomes too oversold and traders start to take profits.

Now is such a dollar rally possible? Absolutely. Especially when everyone and their mother wants to be short the dollar, a contrarian rally could well be in the cards.

But if you’re a long-term investor, honestly it shouldn’t matter.

Long-term the dollar is still declining. In just the past decade the dollar’s long-term trend has been down, regardless of the few short-term rallies we’ve seen.

Also, in just the past decade, the U.S. dollar has lost 21% of its purchasing power. So regardless if the dollar has a nice short-term blip in the FX market, you’re still paying more for everything you buy.

Any short-term rally in the dollar is just an opportunity to buy up more gold and key foreign currencies at slightly cheaper levels.

Bottom line: Long-term the dollar will only continue its decline. Take advantage of any short-term rallies to cash out of dollars and add to your long-term “anti-dollar” holdings.

Good Currency Investing,
Kat Von Rohr, Editor
FX University Daily

P.S. This February 25 – 27, my colleagues and I will all be in Scottsdale, Arizona for our next FX University. The goal of this event? To give you the tools you need to get out of the dollar now. Sign up now and we’ll even give you a $300 discount off the entry fee. Get all the details here.

How Much Your Dollar Buys in the FX Market vs. the Real World

As you guys know, I’m a trader. I eat, sleep and breathe the $5 trillion forex spot market on any given day.

But that’s just my day job.

The other half of my life is spent at home. I live in Texas. I’m married, I have four kids and I’m paid in U.S. dollars like 300 million or so other Americans.

That means my wife and I have to pay for our groceries, gas, kids’ school supplies, DVD rentals, etc. with dollars just like everyone else here in the U.S.

So like you, I have a vested interest when the U.S. dollar buys me less. In economics terms, that’s known as purchasing power.

Now as a trader, I can tell you the dollar has lost against nearly all major currencies in the Forex market over the last 10 years. (See the sidebar below for more.)

But I’d like to step outside of the FX world for just a moment and discuss just how the dollar has sunk outside of the realm of currency trading, for all of you, who like me have to pay for your items with dollars…

1998 Dollars and 2009 Dollars Are NOT the Same Thing

Just to show you how weak the dollar is these days for consumers, let’s look at how many “extra dollars” it now takes to buy things nowadays.

To illustrate this, let’s review the common goods you would have purchased roughly 10 years ago (1998 actually).

Back in 1998…

An average house cost $129,000. Now it’s $180,000 (40% increase)…and that’s after the real estate market crashed.

A gallon of gas was $1.15 and now it’s over double that (actually 143% higher) at $2.80!

A loaf of bread was $1.26 and now it’s $2.39 (90% higher).

A dozen eggs cost 88 cents, now $1.49 (69% higher).

A postage stamp was 32 cents and now its 42 cents (31% higher).

What can we thank for the higher prices over the last decade?

Well, as strange as it sounds in the current deflationary environment, inflation stole your dollar’s value over the last 10 years.

Why Most Americans Don’t See the Dollar is Dropping

Inflation – especially over the years – is so subtle that most people don’t notice.

It’s a lot like boiling a lobster in a pot.

If you drop a lobster into boiling water, your lobster will try to escape. But if you drop a lobster into warm water, and slowly turn up the heat, lobsters won’t realize it and before they know it…they are boiling.

Guess who’s the lobster now? The American consumer.

The U.S. government and its close cousin, the Federal Reserve is pretty slick. They turn up the inflation heat by eroding your dollars slowly. But it’s consistent enough to where your dollar is worth much less just 10 short years later.

Think about it. If I’d told you that tomorrow morning you will pay 143% higher for gas and 90% higher for a loaf of bread…you would freak out. There would be rioting in the streets.

Of course, the U.S. government knows that too.

So the Federal Reserve ratchets up inflation just fast enough to help their causes (like paying back their debts with cheaper dollars)…but they do it slow enough to where most Americans won’t notice.

The Dollar’s Purchasing Power Continues to Plummet

Everyone tends to look at gas to see how inflation is rising. But the reality is that the costs of EVERYTHING you touch are going up astronomically around you and the dollars in your pocket buy less and less all the time.

What’s even worse is that while the costs of goods are on the rise again…unemployment is hitting its highest levels in 26 years. So that means that companies can’t raise salaries to keep up with the ever-rising cost of living.

And unfortunately prices are only going higher from here. In fact, in the next decade, prices could be another 50-100% higher than they are now.

Three Ways to Protect You and Your Family Against the Falling Dollar

You don’t have to be an FX trader to be affected by the falling dollar. No, just make a trip to the grocery store or try to fill up your tank, and you also have a vested interest in how the dollar performs.

Now of course, none of us can stop inflation. But there is a way to hedge against it, and the falling dollar. Here are a few ideas how…

• Diversify at least 15% of your portfolio into stronger foreign currencies including the euro, Aussie dollar and New Zealand dollar. You can do this easily with currency ETFs if you’re not ready to jump into FX trading.
• Calculate how much you have to spend on stocks and bonds for the next year, and then drop 5-10% of that into gold or silver. Again, you can easily do this with gold or silver ETFs.
• Look at your retirement plan. If your entire IRA is in dollars, consider upgrading with a long-term foreign currency CD.

Bottom line: The dollar is losing on all counts. As a trader, I can see the dollar’s overall decline happening on a day-to-day basis. But as a consumer, you can feel the dollar dropping where it really hurts – your wallet. Take action now to protect yourself.

Happy Trading,
Sean Hyman, aka Professor FX

A 17-year veteran in the financial markets, Sean Hyman has been a senior writer for FX University Daily since 2007, and a currency trader since 2001. Sean is also a featured speaker at our upcoming FX University. To hear more of his and our other experts’ ideas about how to escape the dollar in both the Forex market and “real world” read our latest special report here.

Forbidden Currency Options

(Plus, the One Sure-Bet Currency for 2010)

The race to higher interest rates continues around the world. But as of this week, the Fed is still not stepping up to compete.

Like all currency traders, I was listening closely to the Fed’s statement to see if they would remove the easy money policy or show signs of hiking U.S. interest rates any time soon.

And of course they’re not planning on it.

No one can blame them for this, especially considering unemployment is still at 10.2% (as of this morning), banks are still reluctant to lend and the economy is still only floating along on government assistance.

However, on the other side of the world, certain countries are not only winning the interest rate race, they’re preparing to trounce the dollar in the months to come.

As you’ve been reading here in FX University Daily, that includes Australia, New Zealand and Norway. All countries are looking to step up to raise rates (and Australia and Norway have already started the race before the gun went off).

Out of those three currency gems, I’m betting on Australia and the Aussie dollar to rise first as we head into the new year…

My Favorite Currency for 2010…

Now it’s not a secret that I’ve liked the Australian dollar for months. In fact, I wrote you back in July that the Aussie dollar was my favorite major by far.

Also, in the October issue of Currency Capitalist, I wrote to my subscribers…“If I had to pick just one currency to buy for 2010, it would be the Australian dollar.”

So why the Aussie dollar?

Well for starters, Australia offers the highest interest rates of any currency worldwide, so traders will be buying it up in the months to come to gain higher yields. Australia also has a prudent central bank that’s keeping its inflation under firmly under control.

On top of that Australia is the proverbial grocery store for all its surrounding countries. With its rich commodities, Australia feeds China, India, South Korea and Japan and their host of commodity needs. So as China and her neighbors grow, so will Australia.

Then there’s the gold issue. Australia is a HUGE gold exporter, so higher gold prices do tend to affect the Aussie dollar’s value. As of this morning, gold just hit a new never-before-seen record of $1,100. Nothing but good news for the Aussie.

How to Buy When You Don’t Know
When a Currency Will Rise

As you can tell, I’m pretty excited about the Australian dollar going forward.

But that doesn’t mean there won’t be pullbacks and corrections in the Aussie dollar’s price over the next few months. While it’s easy to see the Australian dollar’s long-term trajectory up, it’s a bit more difficult to time the pullbacks.

That’s why I recommended my Currency Capitalist members play the Aussie dollar with currency options back in October.

Currency options allow you to take advantage of a long-term currency trend, but you can use a bit of leverage to earn even higher gains should the trade go your way.

As of this morning, this currency option is already up a nice 24%. Not bad.

It’s a little late to get in on this option if you’re a Currency Capitalist member, but there are plenty of other opportunities down the line with currency options.

If you’ve never heard of currency options, the Philly Stock Exchange first introduced these gems back in 2007. I call them “stock-like currency options” because the PHLX designed them to mimic stock options as closely as possible.

If you’re familiar with stock options, currency options should be a breeze. Currency options have the same trading times, the same expiration dates, and they’re settled in dollar terms just like regular stock options. Like stock options, you only risk the amount you pay for the option (called the premium). Not a penny more.

The only difference is rather than track an underlying stock, currency options let you place long-term bets on 10 different currencies.

If you’re interested in selling a particular currency, you buy put options. If you’re interested in buying a currency (like say the Aussie or New Zealand dollar), you buy call options.

Best of all, currency options are available through any options-approved stock account. This means you don’t have to open a new account. You just need to call your broker and make sure you’re clear to trade regular options.

As I said in the beginning, the race to higher interest rates has already begun. If you’re looking for a way to play those high-yielders, I would look to options first for long-term currency bets for 2010.

Yours in FX Profits,
Ashish Advani

EDITOR’S NOTE: There’s a good reason why traders call the currency options market the “$71,000 hobby.” It’s because conservative traders are bagging tens of thousands every year with long-term bets on these handful of currency options. In fact, we know a remarkable 77-year-old man from Iowa who’s doing just that. Click here for his full story.

The $10 Trillion Dollar Bill

promised you currency notes from the Offshore Advantage Seminar in Los Cabos, Mexico this week. Today, I’m turning you over to our conference insider, Patrick Bove…

-Kat Von Rohr, Editor
FX University Daily

Patrick: After 24 hours in Los Cabos I’m already feeling richer. Bill Gates, eat your heart out, I’m a TRILLIONAIRE!

And so is everyone else…

We’re all holding $10 trillion-dollar bills from Zimbabwe, courtesy of Asset Strategies International – one of the must-see exhibitors at the Offshore Advantage Academy.

Quite the conversation piece! But if we were to convert this note to Pesos and hand it to a porter at the Westin resort, he’d probably give us the stink-eye. (At best it could buy a stale loaf of bread.)

No wonder Zimbabweans have rejected their currency and turned to gold.

Could this ever happen in America?

The short answer is, yes. It’s happening right now, at a slow, but steady pace. A world reserve currency like the dollar can’t “disappear” overnight. But make no mistake – it is on a slow boat to China.

29 years ago, The Sovereign Society’s Chairman, John Pugsley, summed up the dollar’s demise in his New York Times Best-Seller, The Alpha Strategy:

“You are the target of the greatest sting in the history of mankind… To give you an idea of the magnitude of your loss, you are being steadily fleeced of about half of everything you earn and, in the long run, of the majority of everything you save.”

According to our Chairman, “there’s no such thing as a tax cut.” Sounds strange, I know. Who wouldn’t want to pay less tax?

But the fact remains, the Feds could cut your tax bill in half and you still wouldn’t come out ahead. They could slash every tax in the IRS bible…and it wouldn’t matter! And I’ve got proof.

Take a deep breath then look at this chart…

U.S. Spending Continues to Climb…No Matter Who’s in Office

Source: Heritage.org

John showed us how government spending has been on a near-constant uptrend. ALL this money has to come from somewhere. And if they’re not taking it from you today, they’re surely swiping it from you “tomorrow.”

There are only two ways someone can rob you: by force or by fraud. And in this case, the fraud of inflation is robbing Americans blind.

Of course, not if we can help it. That’s what the rest of this week is all about. I’ll be back with more currency notes from here on the ground in Los Cabos. Till then…

Patrick Bove
Your Offshore Advantage Insider

EDITOR’S NOTE: Tomorrow 14 different speakers will take the stage in Los Cabos, and Patrick will once again be reporting from the scene. Now of course, he won’t catch everything. The good news? You can now secure the audio for not just this seminar but every event that The Sovereign Society hosts from now on. This way, you’ll never miss a single global investment, asset strategy or currency play. Click here for details.

Hey, Can You Spare a Dollar?

Imagine that you’ve been borrowing from a specific bank for years because they give you lower rates. Now, all of the sudden, a new bank comes into town and offers even lower rates.

Would you switch banks? I would!

But of course I’m not really talking about banks. I’m talking about currencies.

The new bank in town offering a better deal is the U.S. dollar. And the bank that’s losing market share in the Japanese yen.

Who would have thought? In the last few weeks, one of the traditionally weakest currencies has proven to be one of the outperformers in the FX world. Even the recent rally of the dollar hasn’t done much damage to the yen.

The Dollar, the New “Cheapest” Currency

Before last year’s global recession, Japan was the only country in depression.

For that reason, national banks viewed non-Japanese accounts as less risky. So they’re happy to lend their money abroad. Foreign institutions were also happy to borrow yen from Japanese institutions at lower rates.

This win-win situation made the yen carry trade very popular in the last years.

But now that other countries have joined the deflationary club, Japanese banks have started to change their strategy.

Japanese banks no longer perceive non-Japanese accounts as “safer.” So the carry trade is no longer a good deal for Japanese banks. They now prefer to invest within the country.

Now foreign institutions can also find a better deal elsewhere. The U.S. dollar LIBOR rate (the rate banks charge each other for overnight loan) is now more comparable to yen rates. This is a big incentive for institutions to borrow in dollars rather than in yen.

Japanese Investors Jump into the Mix

Japanese investors are another big engine behind this new carry trade dynamic. It’s now cheap for Japanese investors to hedge overseas FX risk. Let me explain.

When Japanese institutions invest in U.S. dollar denominated assets, they become exposed to Forex risk. More specifically, they risk the fact that the dollar will fall against the yen and their assets will lose value.

So how can they reduce that risk? They can make their liabilities also dollar denominated. In other words, they can borrow dollars to finance their investments.

But before the crisis, the higher rate differential between dollar and yen loans made this “dollar insurance” pretty expensive.

Now that the rates are pretty comparable, Japanese investors have a cheap way to hedge their FX risk. The graph below shows a clear correlation between the lower rates in U.S. and the recent yen appreciation.

The Japanese Yen Closely Tracks LIBOR…


Dollar Carry Trade Short-Term Phenomenon

But the most interesting question is how long this new carry trade scenario will last. Will the dollar replace the yen as the new funding currency permanently?

Probably not!

You see, deflation is a much bugger issue in Japan. Despite near zero rates and massive government stimulus, consumer prices fell a record 2.4% in August from a year earlier.

So this deflationary environment will prevent the Bank of Japan from increasing rates anytime soon.

The Federal Reserve is more likely to increase rates first. And when that happens, the yen will likely give up most of its recent gains and will once again become the favorite currency for carry trades.

But we won’t see that until next year. Bernanke will have his hands tied for quite some time. The combination of rising unemployment, high debt levels in the household sector, and weak bank lending capacity will force the government to keep rates low.

As a result of this policy, the dollar will continue to lose value. And as you know, weak currencies that offer low rates are the best candidates for funding investments in higher yielding currencies. So for now, the dollar will continue to be the preferred currency for carry trades.

The only thing that can save the dollar from being the new funding currency in carry trades is a collapse on the equity market. But if that happens, the Yen will also benefit from risk aversion flows. In other words, scared investors running for cover isn’t enough to push the Japanese yen down either.

Bottom line: Watch for the dollar to remain the cheapest carry trade currency for some time still. Till then, the yen will reign.

Best Regards,
Evaldo Albuquerque

EDITOR’S NOTE: For years, traders held down the yen’s value by using it as the borrowing currency for the carry trade. The same will happen with the dollar. This is just one of many trends that are working against the U.S. dollar long-term. To find out more, read our special report on the 3 Strikes for the Dollar here.

What Treasury Yields Are Saying About Your Dollars

In case you missed it, the beaten-up dollar has been making a comeback this week.

Traders are scratching their heads, trying to figure out if this is a major turn or just another mild correction, including yours truly.

Now, I’ve said before that a major correction in the stock market could save the dollar now. Or as my colleague Ashish said recently, “Wall Street could rescue the buck.”

But besides the stock market, fixed income can also give us a better idea on what’s going to happen with the dollar. More specifically, yields on 10-year Treasury bonds provide powerful clues on the dollar’s direction.

Let me explain….

Inflation Fears = Time for the Fed to “Do Something”

Last week, we finally started to see some inflation expectations in the market. In response, yields on 10-year Treasuries increased dramatically. Remember Treasury yields have to rise to compensate for the loss of your purchasing power caused by inflation.

But higher yields also translate to higher mortgage rates. So when yields rise too much, the Fed gets antsy because higher mortgage rates do not fit into their overall “fix the economy” plan.

Also, with mortgage resets expected to peak only in the first quarter of 2011, the government cannot afford to have higher yields now.

All the big traders in the market know this. So last week, they were all expecting the Fed would step in and do something about the increased inflation fears. Specifically, they were thinking the Fed would have to rescue the dollar or they would risk spiking commodity prices. After all, when the dollar falls, commodities that are priced in dollars rise.

But the Fed didn’t really need to do anything.

Just the fact that traders expected the Fed to verbally intervene in the markets helped prop up the buck. On top of that, there are new concerns about the strong economic recovery. That was enough to rescue the dollar from its freefall. The dollar has in fact been rallying against all commodities since last week.

Don’t Count on the Fed to Help You, Dollar

But next week the Federal Open Market Committee will meet once again. And a lot of traders are still expecting the Fed to change its language to insinuate that rate hikes will come sooner rather than later.

The problem is that the yields are coming down again really fast. In the last couple of days yield fell more than 0.15%. That’s a really strong movement in a short period of time. So the Fed may no longer have the urgency to save the dollar.

With some of the latest economic data, such as consumer confidence and new home sales, surprising to the downside, don’t count on the Fed to change its tune.

After all, investors fear that the equity market won’t be able to move higher without the liquidity that the government is providing. With unemployment on the rise and consumers confidence on decline, if the government doesn’t carry the economy on its shoulder, no one else will.

How to Tell if is the BIG Dollar Rally

So the dollar shouldn’t expect any help from the Fed. The only thing that can save the dollar is the only thing that the Fed is trying to avoid: a sell-off in the stock market.

I’m on the lookout for a collapse in the equity market to confirm if this dollar rally has legs or not. I suggest you do the same.

First of all, I’ve got my eye on a key small cap U.S. equity index that may be indicating a reversal here in stocks. Also, there are three other technical indicators I’m watching (and you should be too) to tell if this dollar rally will continue…

1. Watch for the euro to close below 1.46.
2. Look for the DXY (U.S. dollar index for futures) to cross above 50-day moving average.
3. Keep an eye on the S&P 500. If it crosses below 1030, that could indicate a reversal as well.

Again, stocks are the key to this dollar correction. Watch the breakout of resistance levels in major equity indices for an indication that the dollar will continue to rally.

Best Regards,
Evaldo Albuquerque

Evaldo Albuquerque is one of our head researchers here for World Currency Watch. He specializes in one of the most overlooked sections of the foreign-exchange market, emerging market currencies (a.k.a. “exotic” currencies). To learn more about his currency strategy, click here.

Five Reasons Why the Dollar Could Keep Falling…

The decline of the dollar has taken center stage. Everyone seems to know why the greenback is faltering. But the question of when or if the dollar will reverse its downtrend remains unanswered.

As my colleague Ashish said last week, only Wall Street and a pullback in the stock market will save the dollar from its freefall at this point. After all, when the market panics, everyone flocks into the dollar. But this insane rally is likely to continue until we see some meaningful correction in stocks. Investors are definitely more afraid of missing the rally than getting caught in another bubble.

Unless Wall Street steps in, there are other five good reasons why the dollar could continue to fall…

#1) The Fed is not taking any significant measure to save the dollar because a weak dollar will boost profits of major U.S. corporations and keep the stock market rally going.

#2) Central banks around the globe are dumping the dollar and diversifying into other currencies. After all, they know the dollar will continue to lose its value in the long-term.

#3) With other nations increasing rates, the dollar will continue to be used as a funding currency for carry trades. The latest minutes from the Federal Open Market Committee stated that “policymakers felt inflation would remain subdued for some time amid substantial resource slack.” That means rates will stay low for a long time, maybe for the whole next year.

#4) BNP reports that short positions in dollar have been increasing, but haven’t reached the extreme levels of 2007. So there’s more room for further depreciation. And the decline in DXY has only been retracing the gains from last year’s financial crisis.

#5) With money market funds’ holdings at still historical high levels and investors confidence increasing, institutional investors may be tempting to move cash into stocks during any pullback. They have an incentive to do so because they get paid more if they perform better than benchmarks. That’s what is called the “window dressing” effect.

Again, the rally of the dollar will happen with no doubt. The question is when. Be prepared. Keep an eye on stocks for any short-term pullbacks that could break the dollar’s downtrend.

Also, my colleagues and I are watching this puzzling dollar story play out. We’ll be back here in FX University the second we see any hints of a turnaround.

Best Regards,
Evaldo Albuquerque

Why the Dolts on Wall Street May Rescue the Buck II

The dolt mentality is alive and well on Wall Street.

The same guys who thought subprime securities were a sound long-term investment, who leveraged the real estate market up to the hilt, and then expected Wall Street to bail them out, now have a new guiding principle.

It goes something like this…

“The dollar is sinking, stocks are king again, so everything must be all good in the U.S. once again.”

As if your home currency hitting a 14-month low could ever be considered a “good thing.” But regardless, that’s how they’re thinking. (Dolts!)

Ironically, it’s that very dolt mentality that could spark a short-term dollar rally. The dollar is so oversold right now, and stocks are so overbought, that any hint of a correction could spark a surprise dollar rally later this year and into Q1.

As I explained yesterday, this would be a short-term dollar rally only.

Long-term, the dollar doesn’t have a chance. But for all you traders out there, a dollar rally could give you the opportunity to take some profit on your positions and even set up a few “pro-dollar” Forex trades.

For long-term investors, any coming dollar strength will give you the chance to get in on foreign currencies for the long haul on the cheap.

So what will spark this rally? Well, it looks like earnings season could draw the line in the sand for foreign currencies and stocks.

If Q3 earnings are poor, that could spark the much-needed correction in both the oversold dollar and skyrocketing stocks…

Earnings Season Could Prove the Dolts Wrong!

As I mentioned yesterday, earnings season has already begun.

Yesterday, we saw the first of the banks starting to report earnings. JP Morgan came out with a surprisingly healthy profit for the second quarter in a row.

But don’t let that fool you. Overall, I still believe that the results overall will disappoint Wall Street. And there are a few reasons for my belief…

First, the Wall Street Analysts are now buoyed in their optimism based on their estimates of Q2 being beat.

The CEO’s of Corporate America are also to blame here. After seeing their stock prices decimated in the past year, they are anxious to get them back into positive territory. So they’ll be drinking the Kool-Aid they are selling everyone.

In other words, they think the worst is over and all will be well going forward.

Next, the Q2 performance may be a very hard act to follow. The reason many companies had beat the estimate was due to cost cutting.

Now there is very little cost, if any, to cut. And the sales have not recovered much at all. So how does one beat optimistic estimates when your rescuer (cost cutting) has nothing else to offer and sales (top line) have been anemic in its recovery?

The answer – You will miss the estimates….

Get Set for Another “Flight to Safety” Pattern…

With the dolt mentality in place, the FX traders will watch the U.S. stock markets tank, fear will replace optimism, and they will all buy U.S. dollars and U.S. Treasuries in a “Flight to Safety” pattern.

We have seen this flight before last September when the whole financial mess was unfolding. The U.S. Dollar soared then.

And while this is completely counter-intuitive, I suspect we will see this happen again. It will not be as severe as last year, but I suspect this will happen again. We will have wasted the opportunity to learn, and will repeat our mistakes again.

History will repeat itself!

Bottom line: I would look for a dollar rally for the next two months. Traders, look to buy the buck, and sell risk (stocks/currencies) to profit!

Yours in FX Profits,
Ashish Advani

P.S. I’ve been preparing my Global Currency Options subscribers for this dollar rally for quite some time. We’ve even set up a special bear-bull strategy that lets us profit even if there’s a pullback in one of my favorite currencies in the market right now.

Why the Dolts on Wall Street May Rescue the Dollar

It’s cold and raining outside. It’s damp and dark, and I’m in a foul and dark mood. But it’s not because I’m getting used to the Alaskan weather in my new home.

It’s because I keep watching the dollar fall farther. Today, the dollar actually hit the lowest it’s been since August of 2008.

I don’t know about you, but I have been watching in morbid horror, the slow train wreck that is the U.S. dollar. As a currency expert, I can see the collision course the dollar is on. I know the falling dollar is just going to accelerate and get worse over the next few years.
Frankly, it’s depressing to watch.

But there is a ray of sunshine in this whole sordid affair. That’s the dollar may be a train wreck waiting to happen in the long-term. But the short-term could be an entirely different story altogether.

The Long-Term View…

So let’s put on our trader hats for just a second, shall we? Rather than telling all you long-term investors how to hunker down and prepare for the long-term dollar decline (as is usually our stance here in FX University)…I want to talk to you traders out there for a moment.

Because believe it or not, in the short-term, we may be looking at the biggest dollar surprise since the dollar did a complete about-face in July 2008.

If you happen to be a trader, this could be your opportunity to grab some massive short-term profits later this quarter and into Q1 in the Forex market as the dollar makes a temporary U-turn.

If you are a long-term investor, any coming dollar strength (however short-lived) would be the time to load-up on cheaper foreign currencies while you still can.

Who Would Be Crazy Enough to Push the Dollar Higher

Believe it or not the same U.S. corporate America and Wall Street may now rescue the U.S. dollar in the short-term. The destructors may actually be the rescuers now!

Let me explain! I believe the dolts have it all wrong, but I am smart enough now to stand in front of a train rolling downhill.

We are at the beginning of the “Earnings Season” for the third quarter (Q3) for corporate America. Starting today we will see the banks report their Q3 numbers. Alcoa, the commodities giant, has already reported their Q3 and surprised the market with healthy numbers.

To backtrack a bit, the second quarter numbers for most companies were positive. The results beat the analyst estimates.

Now the problem I see here was that the analysts had become very pessimistic in their expectations coming out of last year and the dark days of September 2008 – March 2009.

Companies were able to produce decent results compared to ‘estimates’ because they slashed spending to the bone, and in many case into the bone. So those very “positive” companies that beat estimates were on the bottom line. In fact, most missed on the top revenue line.

This all caused the U.S. dollar to fall based on the fact that things were improving in America! As in the “flight to safety” was finally over, stocks are king again! Everything is smooth sailing once again!

(If you’re thinking “WHAT?!” You’re not alone…)

Dolts Spark Dollar Reprieve

This is what I call the DOLT mentality.

The traders punished the dollar when the economy seemed to improve here in the U.S. and abroad.

The Short-Term View…

It was as if all the big traders decided, “things are good here, time to invest in more ‘risky’ assets again!” That includes the stock markets overseas as well as higher yield currencies such as the Australian dollars and euro.

At the same time, they punish the U.S. Dollar when things are “good” in America. Hmmmm…

So what happens when the sheen of the “feel good America” wears off? Well, for starters, we’re going to see a correction in stocks and other risk assets. If that happens, what will happen to the dollar?

You got it! Traders will buy up the dollar once again as they dump all those stocks and high-yielding currencies. Hence, short-term dollar rally!

This is just part of the story. I’ll be back tomorrow with an in-depth look at Q3 earnings, a long with the best ways to take advantage of this coming dollar strength.

Signing off from my strange new corner of the world in Alaska…

Yours in FX Profits,
Ashish Advani

P.S. I’ve been predicting a short-term dollar reversal in our monthly newsletter, The Currency Capitalist for quite some time. Members, I just wanted you to know, I’m continuing to watch this reversal carefully and will inform you the moment I see this trend affect your long-term currency portfolio.

Uncle Sam’s “Invisible Tax”

And How to Legally Avoid It

Some experts call it the “government’s invisible tax.” You have been paying it for years…whether you know it or not.

Technically, this invisible tax has many names. You can call it “inflation” — although that doesn’t tell the whole story. You can call it the Fed’s failed “strong dollar policy,” but even that can be misleading.

No, I’m talking about the real tradable value of your money. So the easiest way to describe the invisible tax is to call it “loss of your purchasing power.”

In other words, every single dollar you ever earn buys less and less each year. Less college tuition for your kids. Less groceries. Less weekend toys (boats, cars etc). Less for your vacations. Less savings for your retirement.

And in the last four decades, you and your family have lost a whopping 92% of your purchasing power. You’ve lost 21% of that purchasing power in just the last nine years.

Here’s where the government comes in…

By controlling money, politicians can control how much anyone spends — including themselves. Over the last few decades, the government has quietly ballooned our money supply and manipulated money’s overall value.

You see, money is a commodity like anything else. If you flood the market with a supply of any commodity, it will naturally be worth less.

But here’s the catch: Usually when you have a glut of commodities in the market, those goods drop in price. Commodities become more affordable and give you a higher standard of living.

On the other hand, money is ONLY a medium of exchange. Money has no other purpose, no value on its own. This makes it a demand tool. The more demand tools you throw in the market, the less they’re worth. In other words, if you flood the market with dollars, your dollars are simply worth less. And their real value — what they can buy you — is worth less.

By determining your money’s value, governments literally hold the puppet strings on your wealth. They decide whether your dollar will buy a cup of coffee or a half stick of gum — not directly, but indirectly, by controlling how much cash is in circulation.

In this way, it’s just as if the politicians are dipping their hands in your bank accounts and retirement savings and collecting this “invisible tax.”

The only real legal way to avoid this tax?

Look at your overall net worth, and make the conscientious decision to diversify 10% to 20% into non-dollar assets. This can include buying stronger foreign currencies, making a long-term investment in precious metals like gold and silver, or even buying key commodities that rise in value as the dollar falls.

Bottom line: You will never be able to control the U.S. government, or how they manipulate the dollar’s value. But you can take control of your portfolio so your long-term wealth doesn’t suffer.

Good Currency Investing,
Kat Von Rohr, Editor
FX University