Guest Post: Is the Dollar a Buy? I’m Beginning to Think So!

Tyler Durden's picture

Submitted by RCS Investments

Is the Dollar a Buy? I’m Beginning to Think So!

While developing my outlook on the US dollar, Bob Farrell’s rule
number 9 comes to mind- “When all the experts and forecasts
agree––something else is going to happen”.  The number of dollar bears
is disturbing.  I find my own forecast moving inversely from the growing
consensus; while I am not officially bullish on the currency yet, the
time may come in short order.

My first reason for beginning to feel bullish boils down to
sentiment. Forecasts for hyperinflation and a falling dollar abound as
gold races higher and it is all but given that quantitative easing will
occur. The “sell the dollar” trade grows more crowded by the day, and
the potential for disappointment is much higher now that everyone
expects quantitative easing. If the Fed proceeds with quantitative
easing we may have a short covering rally as the news is sold and there
is no one left to further sell the dollar. On the opposite end, if the
Fed chooses to delay full scale quantitative easing, that would
certainly be dollar bullish.  Continued deterioration in economic
fundamentals leads me to believe we will get some sort of quantitative
easing announcement either in November or in December.  However, given
that the first round of quantitative easing hasn’t worked in producing a
sustainable and strong recovery, evidence continues to mount that
sentiment towards continuing this strategy is changing.  Various Fed
officials, such as Plosser and Kocherlakota,
are beginning to doubt whether additional quantitative easing will have
much of an effect (interestingly, these two Fed officials will become
voting members of the FOMC next year).  Thus, while we may indeed have a
quantitative easing announcement in the coming months, it may not be as
large as the market  would like and potential roadblocks may pop up
next year as it becomes clearer that a second round results in a lower
marginal benefit.  Everyone seems to be forecasting action amounting to
quantitative easing will lead to hyperinflation, spiking gold, and a
plummeting dollar.  The contrarian in me tingles.

Second on my list of reasons to feel more bullish about the US Dollar is a wild-card, but is becoming more probable with every passing day leading up to the mid-terms.  The House of Representatives has just passed
a bill amounting to protectionism.  Consider that China is still an
export-oriented economy that continues to depend on a lower valued Yuan
to continue its export growth.  Their export sector operates on razor
thin margins that would vanish if the Yuan appreciated in a meaningful
way. I spoke about this here.
I believe that if the US and China fell into a trade war, the communist
nation would have more to lose as the nation would no longer have
access to the US consumer to the degree that it had in the past; exports
would fall sharply. Couple this sharp decline in exports with a
possible housing bubble and you would have an even higher probability of
a hard landing for the Chinese.  Don’t forget that we have a sentiment
problem here also, as most forecasters expect the yuan would appreciate
should Chinese officials loosen the peg, but in my view, should the
aforementioned protectionist legislation be enacted, the opposite of the
general consensus would occur.  The Dollar would rise in value versus
the Yuan as the “China-dependent” global economic recovery would
effectively be derailed. It also bears mentioning that the GOP and Tea
Party movement’s stance on China is even more hard-lined than the
Democrats. With upcoming midyear elections poised to net a conservative
gain in the US Congress, anti-China rhetoric will only increase.

The third reason I’m inclined to shade bullish on the US Dollar is
more secular in nature. While we have seen commodities and other assets
increase in value due to the Fed’s strategy of flooding the system with
money, most of this cash is not making its way into Main Street. Core
CPI as well as pricing metrics in the ISM surveys continue to show that
businesses lack the pricing power necessary to pass on these higher
costs to consumers. While many fear a hyperinflationary event, I see
deflation on Main Street. Households continue to seek cash as
uncertainty in their employment and declining housing prices keep
confidence low.  Posh retirement plans have been decimated and many
retirees are finding themselves scrambling for cash as they load up on
fixed income. Main Street is thirsty for cash.  Also, when strategic
defaults rise and credit scores subsequently take a beating, debt is not
being paid back. Undergoing a strategic default is akin to making money
vanish. According to the latest “Flow of Funds” data,
debt levels in the US economy are at alarmingly high levels- roughly
$13 trillion in the household sector- and if any of this debt is
defaulted, dollars are essentially destroyed.  In formulating their
outlook for the US dollar, many experts concentrate on the supply of
dollars being produced by the Fed’s quantitative easing strategy, but
maybe they should focus more on the destruction of dollars caused by
debt defaults. Another leg lower in housing prices is sure to increase
the probability of strategic defaults rising.  Also, the historic
decline in the purchasing power of the dollar has been caused in part by
the expansion of credit.  If credit doesn’t expand, dollars are not
being created.  Destruction of dollars via strategic defaults and the
end of large credit expansion is a secular reason to feel bullish about
the dollar.  Although I wouldn’t say that the dollar is a on the verge
of a secular bull market, these factors are worth considering.

My last two reasons for trending bullish in my outlook for the dollar
are not as substantive, but should leave someone advocating
hyperinflation and the imminent decline of the dollar reconsidering
their position. First, let’s take a look at the value of the Yen.
(Courtesy of Yahoo Finance).

This chart shows an overall strengthening Yen/Dollar relationship
from 1999 to the present.  Next, let’s look at an action timeline on the
Bank of Japan.  Note that I am only using this chart as a timeline on
the bank’s quantitative easing announcements.

As you can see, during this period of quantitative easing conducted
by the Bank of Japan, we saw the value of the Yen remain mostly constant
from start to finish.  Why?  One would think that such a strategy would
send the Yen lower, but clearly that’s not what happened.  Note that
the dark shaded area in the chart above corresponds to the dark shaded
area in Yen exchange rate chart.

Finally, one last chart here courtesy of Sahil Aliv shows the Fed Funds Rate from 2002 to mid 2010.

We see that the Fed began increasing the rate starting roughly in
April of 2004 and ending around the same time in 2006, plus or minus a
couple of months.  During this time the Yen did decrease in value versus
the dollar, but not nearly to the degree that one would expect given
that the Fed was raising its Fed Funds Rate while Japan was in the midst
of quantitative easing (see red shaded box in historical Yen chart).
 In fact, the major Yen bottom formed in late 2007 was actually higher
than the one in 2002.  Quantitative easing implemented by the Bank of
Japan did not translate to a plunging yen as many forecast the dollar to
do in the near-future.

Finally, if hyperinflation is imminent, then why are Treasuries being
snapped up so furiously?  The bond market has always done a better job
at forecasting what the economy will do than stock or commodity markets.
 If the value of the dollar was going to plummet, then why aren’t we in
the midst of a bond selloff?  Again, look at Japan.  The 10 yr rate on
their government-issued debt is under 1%, despite repeated and
inaccurate forecasts for hyperinflation to strike that nation due to its
astronomical debt levels and repeated quantitative easing.

Despite pervasive bearish sentiment, due to the aforementioned
factors, I’m starting to feel more bullish about the US Dollar into
2011.  Main Street is saving and paying off debt.  Other news points to
strategic defaults becoming the norm.  All this implies that Main Street
demands dollars with one hand while the other hand destroys dollars by
defaulting on debt.  Ultimately, the fundamentals of the economy are
what move the markets, and the fact that these fundamentals are still
shaky can’t be ignored.  If things begin to go awry, the dollar will
still be the safe haven currency.  Once again, I am not officially
turning bullish, but it’s making more sense to jump off the boat as it
is pretty crowded.

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99er's picture

(Reuters) - The International Monetary Fund said on Tuesday that sovereign debt risk in Europe and continued real estate woes in the United States have dealt a setback to global financial stability in the past six months.

infotechsailor's picture

99er, did reuters mention the 3M?


as for this article


on reason 1, contrarian for contrarian's sake (only useful before the crash, everyone can see it after)

on reason 2, protectionism. not likely under republican majority. nevermind that cutting chinese imports will only remove chinese incentive to prop the dollar with debt purchases.

on reason 3, debt defaults by consumers still sit on the books of banks. that "bad debt" will still be marked-to-fantasy, put in a trash bag and sold to uncle ben 


spartan117's picture

Finally, if hyperinflation is imminent, then why are Treasuries being snapped up so furiously? 

Uh, maybe because the Fed is buying?

LowProfile's picture


Main Street is saving and paying off debt.  Other news points to strategic defaults becoming the norm.  All this implies that Main Street demands dollars with one hand while the other hand destroys dollars by defaulting on debt. 

Since defaults are the norm (as opposed to saving more), doesn't this mean that the banks are going to have to eat it?

Ultimately, the fundamentals of the economy are what move the markets, and the fact that these fundamentals are still shaky can’t be ignored.  If things begin to go awry, the dollar will still be the safe haven currency.  Once again, I am not officially turning bullish, but it’s making more sense to jump off the boat as it is pretty crowded.

If fundamentals ran this economy, we'd be at SP 170!  This market is run by the Fed and the gov't...  For now.

It seems to me that as defaults increase, and banks eventually have to realize the loss (hey, perhaps all these foreclosure 'halts' are just a way to keep the banks from having to immediately realize the loss?), then they will require recapitalization to stay in business.

That means more QE.  A lot more.

So perhaps your thesis that the dollar strengthens happens, but it will only be until the Fed resumes it's primary purpose, insuring the existence of the giant multinational banks.

But your point of dissention in the ranks of the Fed and the crowded trade has merit, so here's what I think:   QEII is delayed, or not as much (per your thesis).  The market tanks, and gold pulls back a bit with it as bad dollar bets are covered with whatever is available to sell (IMO gold will correct to ~$1265).

Then once it's apparent that the big banks are toast w/o further sleazy money, QEII is announced, the stock market goes sideways and then down, and gold goes to the moon...

...Eventually getting to the point where nobody will sell you gold for dollars, at any price.

SheepDog-One's picture

Hmm appears RCS Investments is caught way long dollars? Oh well sucks to be them.

midtowng's picture

The dollar will be the last fiat currency standing, mostly because so much of the world's debt is priced in dollars. That's really all you need to know.

The dollar will eventually rally compared to other fiat currencies when the whole system is breaking down. That doesn't necessarily mean that you want dollars.

Goldenballs's picture

Until you have a sound economy with solid industries where people have jobs and can see a brighter future your wasting your F******g time.Buy Gold buy Silver then you,ll have a pot to piss in.

scratch_and_sniff's picture

Crisis averted, ISM 53.2 ...QE2 OFF!!! errr.


will the Euro tank here? i wonder.

Pimp Juice's picture

I would stay on the gold boat. The dollar is a BYE!

antidisestablishmentarianismishness's picture

Plus, you can burn dollars to keep warm if necessary (like when the govt turns off your furnace, oh my), unlike gold, which can only be used to reflect a tiny bit of sunlight onto you.

Oso's picture

short dollar is the world's most crowded consensus trade.  i have every economist and delta-bravo trader out there telling me i "HAVE" to be short dollar.  I am taking the other side now, short JPY especially.  Look at a chart back to 1971, all-time low is 82.70 something.  World wont let US get away with it, just becomes more and more nuclear.

-1Delta's picture

it is such a crowded trade... retail is like sheep going to slaughter...  i have added to my position for 3 trading days strait... I always call an etrade broker and ask him his thoughts bc "I am interested in an account." He gives perfect contrain advice bc he said all his clients are doing it and it is working great !

Internet Tough Guy's picture

Stupid ponzi money games. Real 'money' isn't a trade.

A Nanny Moose's picture

Heh. Been thinking about trading some gold....for some more silver. Or maybe it was the other way around...that silver is getting a bit heavy. /shrug

Quinvarius's picture

The dollar a buy vs what?  Other currency maybe because they are all printing.  Buy it vs real assets and you are an idiot.  You cannot just print money without eventually paying the piper.

Mercury's picture

Seriously, buy $US vs. what? 

This guy would rather have $US than gold? than Swiss francs?  Maybe vs. some other, race-to-the-bottom fiat currency but why bother with all that noise?

If a public company issues a massive secondary share offering, the conclusion that existing shareholders will be diluted is not a "crowded trade" it's a fact.

Calls and Putz's picture

"Main Street is saving and paying off debt."


Uh no - they're not.   Consumer debt is declining because of credit card charge offs. Consumers are not paying down their debt on balance.

Dr. No's picture

Lately people have been using contrairian analysis more and more.  They feel since traditional analysis has been completely wrong, blog writers need a new method to keep the interest of the readers.  Enter contrarian indicators.  Since nothing else makes sense, use the George Castanza guide to investing: do the opposite.  Most experts believe the earth rotates around the sun.  Does that mean I am going to bet on an earth centric model?

LibertyIn2010's picture

The reason contrarian advice is popular now is that thanks to ZH and others the investors formerly known as "dumb money" are waking up to the Ponzi known as Wall Street, The Fed, etc.  When the game is rigged and the crooks are giving bad advice to the masses to purposely fleece them from their money, then the contrarian view point turns out to be the right thing to do (in most cases). 

thesapein's picture

It's the Contrarian Bandwagon. Reminds me of the alternative crowd in high school who all dressed alike in black. They think they get it.

What's hilarious is that you can't be a contrarian by supporting the most popular currency in the world! Talk about returning to the herd... 

tmosley's picture

People were down on Confederate currency as well.

I just watched Gone With the Wind the other day.  Back then (both during the Civil War, and when they made the film), they knew what real money was.  When they got money, the first thing they asked was "gold or paper?".  They all knew the paper was pretty well worthless.  Only gold held its value.

Djirk's picture

Looking at the flow of funds report, that consumer balance sheet is still fjugly.

Also gives further proof the FED needs to be gutted and replaced with more competent players.

How can anyone not see a problem with the consumers adding $3 trillion worth of debt over three years. Hello, increase interest rates to create price stablility.

Agreed that the dollar may be taking a beating now, but until some of this paper junks is written off there will be safer havens.

unum mountaineer's picture

 get the fuck outta here and STFUH (the "h" stands for hoe for those who dont know). so because everybody is on one side of the life boat, I should do the oposite? fuck that..fuck fiat and all who bow down to it..uuhh, thanks...i'll use my sense and sensibilities because as I know most know...sense is not a common thing! fuck 'tard bull I feel punchy again..

firstdivision's picture

While I agree with the author that the dollar will strengthen, I have to say it is too early to be calling this a bottom.  Look at the half-life of other CB's when they try to weaken to the dollar.  We have not bottomed out yet, especially with more POMO's and other future Fed liquidity injections on the way.  When it comes to a race to the bottom, no one can do it as well as the US.  

SheepDog-One's picture

The dollar as everyone now knows is slated for destruction and it looks like a 'buy' to this guy who says his reasoning is based on 'everyone buying bonds'? Well I guess everyone is, as long as everyone means the FED itself.

Nihilarian's picture

Long Dollar and Long Gold.

The Ladder b/c all currencies are falling. The former simply on a relative basis due to manipulation by every other currency to depreciate faster than dollar. The end.

tunaman4u2's picture

Why is USD dollar down when JPY is printing? 

Ms. Erable's picture

LMMFAO! Buy dollars? Why would I trade my coin "collection" for minor and extremely temporary gains in fiat? Fully stocked on toilet paper already, thank you.

SheepDog-One's picture

Right, 'no thanks' on this guys opinion you should sell your rapidly advancing gold and buy fiat toilet paper instead due to 'technicals' LMAO.

Oso's picture

i dont think he is all saying sell your bullion.  But, buying some 2-3 month puts might make sense.  This call is relative to other currencies, which ultimately all relational.


Im in PMs too, but a lot of you guys need to calm down and remove the emotion from your trading. 

SheepDog-One's picture


SheepDog-One's picture

Screw options too, totaly controlled by Master Blaster never seen anything more rigged in my life than opex days lately, anyone thinking theyre outsmarting Skynet with their Commodore 64 is dreaming. Next up, go to Plan B economic and terrorist fear and panic, since the insolent peasantry is not impressed with Bernanke/Geithner print and pump fest.

thesapein's picture

Currencies but not including precious metals? You seem to be the one with an emotional block. Emotions aside, we'll see how well your dollar does against silver in the coming months.

SheepDog-One's picture

ISM news is great so no Q/E2 right?

brandy night rocks's picture



Taking on the two most irritating groups on Zero Hedge - the gold bugs and China nuthuggers.  Nice.

SheepDog-One's picture

In Weimar Germany at least the PEOPLE had the money, in Weimar USA the psychotic printfest goes directly back to the central banksters. The Germans had the luxury of wheelbarrows full of worthless paper, we got bupkis.

Ms. Erable's picture

Because gold and silver are "just commodities", right? I'm still chuckling...

Itsalie's picture

I am not sure we are in a typical environment where contrarian approach could work. Clearly the people on main street around the world has woken up to a near crisis mentality vis-a-vis the USD.

From my recent trip to Asia less than a week ago, every vendor and their finance people I spoke to in asia want to sell their dollars as soon as they get a USD denominated purchase order; either that or they will offer a small discount to customers who can pay in euro or local currency, but we are sticking to paying in USD for obvious reasons :)

Exchange kiosks staff at all major shopping areas from bangkok to seoul shake their heads each time I try to bargain for a better rate to sell USD and buy the local currency - less than a month ago they would entertain giving a better rate for larger amounts. The spread quoted in several kiosks in Thailand for dollar-baht was 28.xx/32.xx, ridiculous spread; usually its no more than 0.5 baht spread. The USD is trash-paper everywhere.

MrMorden's picture

Everybody is running away from the gas chamber...quick, do the opposite and we'll be smarter than them all!!!  LOGIC FAIL.

thesapein's picture

The reasoning is even worse than that. It's more like everybody is showering in the gas chamber while a few people are headed for the exit. Among those few, one turns around and heads back to the showers, rejoining the larger group about to die, then announcing, "I'm a brilliant contrarian!" Famous last words.

Panafrican Funktron Robot's picture

I noticed you had a relative strength graph on there as well, that's really not a bad indicator to utilize when it comes to the big 6 currencies.

GFORCE's picture

Brave man pitching a pro dollar article on this site.


rhyzimmer02's picture

Parabolic lift off starting here (in gold and silver) and yes the dollar will be a buy eventually after it crashes and burns which may be quite soon


contrabandista13's picture

I sincerely doubt that we'll be calling it "the dollar".....  If the trhee branches of government were stocks, I would sell them short...  Oh...!  Wait a minute...  I can sell them short...


best regards,



SheepDog-One's picture

Stock-centric economic policy, the dollar will become more and more worthless the more they print and pump stock for an 'all is well' stock market illusion based on the belief that people see stocks up and are happy. Well the peasantry is broke and seeing them pump up stocks only makes them more angry. FED painted into a corned with pure gold paint. The pumpfest party is about over, I think I just saw Bernanke under the bathroom sink licking an empty Sterno can.