Dollar to turn back up?

December’s themes have been ‘quantitative easing,’ the ‘bond bubble,’ and the resumption of the dollar crisis. It seems as though reaching the $9 trillion bailout figure and ZIRP (Zero Interest Rate Policy) triggered some more recognition of Bernanke’s plan to destroy the currency. This helped to spur a rally in Euros, Swiss Francs and gold, all of which were oversold thanks to the general unwinding of the inflation/anti-dollar trade this fall.

The long bond is severely overbought at near 2.5% (though it can come back after a correction, this being a strong deflation). It is essentially all risk and no reward. Buyers at this price assume huge interest rate risks, but the fall in the dollar this month eliminated a fair chunk of currency risk in US bonds. If bonds sell off, as they should simply because the market is so bullish, I expect the dollar to regain much of its lost ground, thereby maintaining a kind of balance.

I have had some mild trepidation in seeing the Swiss Franc come back to 95 cents from 81 last month (I figured 90 would be all), but a quick check of Yahoo’s currency page reveals that the market still treats this venerable script much the same as the EU’s shaky upstart (3-month chart. CHF in blue, EUR in red):

Source: Yahoo! Finance. Click for sharper view.

The Franc of course is a far superior currency and lately strong against the Euro, but there has been no phase change since last summer, when I first got bullish on the dollar and realized that despite fundamentals, the Franc was due for a fall. The Euro is just as fundamentally junky as the dollar, since the ECB will surely come to ZIRP as well, and the Eurozone is under tremendous political strain. Plus, most people still think it is better than the dollar, and all things being equal it is usually preferable to be contrary.

Now let’s layer gold on here (GLD in green):

Source: Yahoo! Finance. Click for sharper view.

So gold still trades like a currency, albeit a volatile one.

Now let’s layer on the long bond (TLT as proxy):

Source: Yahoo! Finance. Click for sharper view.

So that’s what I’m working with. All three asset classes look overbought to me: bonds, gold and the Euro/CHF, and I suspect that their rallies are related and associated in traders’ minds with recent Fed and Treasury actions.

Could a sell-off here coincide with a surprise resumption of the equity crash, now that the widely-expected (even here) bear market rally (something akin to the 45 percent move from Nov ’29 to April ’30) has yet to materialize with any real strength?

October and November unwound a lot of old bull market positions, but not all of them. The equity culture is still alive, and since it’s never the thing you fear that gets you, perhaps despite Mr. B and the Bailouts, the dollar is not done with its comeback.

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5 thoughts on “Dollar to turn back up?

  1. 1. Doesn’t all fiat turn to dust rapidly vs. gold as governments overspend on the endless bailouts without any ability to repay the loans except by printing?

    2. Might we even see some sovereign debt default.

    3. Can a private individual buy credit default swaps against sovereign debt?

    Thank you.

  2. If there is a Treasury sell off where will that money go?
    Given it is likely owned by wisely fearful individuals, one must surely anticipate some to find its way into the Gold market.
    Especially as the rationale for selling now would not likely be a greater risk appetite but fear about the solvency of the US.
    Where to hide? Gold…Oil maybe.
    Anticipation of renewed USD strength is an anticipation of another wave of liquidations. The deflationary implications of this must be bullish Treasuries.
    Personally i am short Treasuries and long Gold. The Treasury short is easier, as i will know if i am wrong cheaply.

  3. “1. Doesn’t all fiat turn to dust rapidly vs. gold as governments overspend on the endless bailouts without any ability to repay the loans except by printing?”

    Not necessarily rapidly. Look at Japan.

    2. Might we even see some sovereign debt default.
    Yes, lots.

    3. Can a private individual buy credit default swaps against sovereign debt?
    Only if you have an 8 or 9 figure account.

    If there is a Treasury sell off where will that money go?
    It just changes hands.

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