Friday, October 08, 2010

Be Careful Dogging the Dollar

By Eric Jackson
RealMoney Contributor

10/8/2010 7:45 AM EDT
Click here for more stories by Eric Jackson

The negative chatter about the U.S. dollar's decline is overdone. As we've learned twice already in the past year, just because a crowd of people says something is inevitable does not make it so.

At the end of 2009, the level of pessimism around the U.S. dollar was very similar to that of today. There was no shortage of people saying we were on our way to debasing the currency. The Fed had rolled out its quantitative easing (QE) program, taxes were going to rise, there was no plan to rein in entitlements and the president's health care plans took up much of the headline space available in newspapers.

Back then, I suggested in these pages that the dollar's weakness would probably reverse course and that the currency would rally for most of 2010. I also argued that the dollar would always be a "safe haven" for investors to store value in. That turned out to be the case for the first four months of this year -- and that was when the stock market was also going up. Imagine that: it is possible for the U.S. dollar and equities (not to mention commodities) to rise at the same time. Who knew?

Of course, when the European sovereign debt crisis stole the headlines in late April and into May, we saw a knee-jerk response as investors fled out of equities and into the dollar. The U.S. Dollar Index Future (DXY) bounced from near $74 in early December last year to over $88 in early June.

However, the dollar has since slumped back down. The DXY is back to $77 at the moment and the Cassandras are echoing the same arguments we heard last year. This time, however, there's a slightly new spin. Instead of simply making the case that the U.S. dollar is doomed, we are hearing (with increasing regularity), that all world currencies are in a race to the bottom.

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