Tuesday, August 05, 2008

The Dollar........

The more I have been reading of late the more I get the feeling that the Dollar is in the beginning stages of a big move higher. For a while now I have been pointing out that the dollar did not make new lows, even with Crude making new highs. Clearly that was the case earlier in the year and now that Crude seems to have “turned over” it will be an even greater incentive for Dollar buying. But let’s look at a more critical factor, demand for Dollars. When countries do capital raising it is usually done in the cheapest and most liquid currency available. This is and has been the Dollar. The reason is the real or perceived notion that the Dollar is overvalued. Because of this the Dollar’s should be cheaper to fund because when it is time to repay them they should be “depreciated”.

Capital investments therefore in major developing markets have been made in Dollars. Look at the foreign direct investments in Brazil, China and Mexico. Extremely large amounts of Dollars have been flowing in for years. Most of them borrowed, how you get these Dollars, buy buying them. It is an interesting thought.

Also think about credit spreads. I know a few months ago when spreads were “blowing out” the market was looking to raise dollars any way they could. FX Forwards were being hit across the all currencies (the market wanted to B+S Dollars). Again it refers back to the above observation, the market (countries) borrowed Dollars and need to re borrow or buy them back when they are maturing. It has to (famous last words) occur. If you are like me and think that European Rates are not going any higher and that Credit spreads will widen out, then the Dollar should go higher. Time will tell.

A lot of my thought above came from an article written by John R. Taylor Jr., the Chief Investment Officer for FX Concepts.

Another item that peaked my interest was that IMM speculative positions went long Dollars for the first time since June. I also think that in the States we are expecting bad news. John Thain of Merrill Lynch was on CNBC today talking about how things will be bad in the States into 2009. Now I tend to agree with him, but if the market is expecting bad numbers, getting them will not spoke them. I think it is this realization which will help us to turn the corner (for the dollar). Bad news here expected, bad news elsewhere a cause for concern. Lower rates abroad, narrowing differentials create another incentive to buy Dollars.

BUT, currently I still do not have a meaningful position in the Dollar.

Good Luck and Good Currency Trading



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