USD Hitting New Lows

Posted by Ray on October 19, 2009 under Main | Be the First to Comment

There is no question that the cheap dollar has had its benefits for the US in the short-term. It has propelled earnings higher for most firms who deal internationally, narrowed the trade deficit and pushed stocks higher at the expense of our buying power. It has also pushed oil and commodity prices, mainly gold and other metals higher, as well as the dollar continues to touch new 52 week lows.

There is a point where the cheap dollar begins to lose its appeal and begins to concern traders and we have to wonder if we are there yet. After we breached the 76 level on the DXY I actually expected to see a rebound in the greenback simply because it is such a crowded trade and other countries have also printed vast amounts of their currencies as well. However, this seems to not be happening and we are at the point where the 75 handle is in jeopardy of being breached.

Frankly, at this rate we are heading right to the 2008 lows of the 71-72 levels and there is not much there to stop it from going lower. All I have to say is if you thought $147 barrel oil was bad, try $200 or more a barrel. Yes, it could get that bad and food prices could go up as well, even though we technically have deflation energy prices would and could create inflation. This would be catastrophic considering we have massive wage deflation and a huge unemployment problem right now. I am inclined to believe that the treasury or the Fed would intervene if we breached those levels, but my faith is not strong and given the trading programs and deep pockets of the banks, ironically, because of the Fed it could become a crisis.

The odds are against this happening, but it does exist. If this does happen it would also not be good for stocks as there is a difference between cheap money and worthless money. It is not like I am the first to warn of such a problem, Jim Rodgers warned of this type of currency crisis in the recent past and thought it could be either the USD or the Sterling, since we both started down the same destructive paths. I will say that I believe the next 2 weeks will be critical for the greenback and everyone should keep an eye on it for an indication of its direction. A steep move in either direction would mean a selloff in equities.