Why will the dollar rally?

[Moonshine]

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Post your thoughts. I've been short the dollar since mid summer and I want to lever up. Someone tell me why this could potentially be a bad idea, I want to see if I'm missing anything.

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Rate cuts are now less expected. Therefore the dollar, which had started to price in many rate cuts, may start to rally.

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inflation concerns should be bearish for the dollar though...I would expect this to not be a big factor

[kimchi]

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Someone tell me why this could potentially be a bad idea

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I don't think anyone can tell you unless we know the timeframe you are trading and your objectives for this particular trade.

[ItalianFX]

I think the nonfarm payrolls will decide where the dollar heads next. When I traded FX, I always saw nonfarm payrolls as a very volatile moment in the currencies.

If nonfarm payrolls are up, I expect the dollar to rally. My prediction is that nonfarm payrolls will be up this month and we could see a pullback in the EURUSD. I don't think that would be the bottom of the dollar fallout, but I think it could be a break among all the terrible news of the subprime crisis.

**I could be totally wrong, so take my prediction for what it is worth.

[APXG]

A bigger concern could be the magnitude of the rally, given the steadily depleting pool of eligible buyers for the various tight-stop shorts to sell to.

[Mook]

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Post your thoughts. I've been short the dollar since mid summer and I want to lever up. Someone tell me why this could potentially be a bad idea, I want to see if I'm missing anything.

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I'd be scared as hell of going short the dollar at this point, largely because everyone who has an opinion on the matter either (a) wants to go short or (b) already has. And every single one of those people will have to either (a) buy those bucks back themselves or (b) be forced to do so, if and when the trade starts moving against them.

More succinctly: As I remember reading many years ago in an issue of Barron's, "If the majority were right, the majority would be rich."

Mook

[ArturiusX]

Because those who have been holding a short for the last year think this is a good time to take profits.

[Shoe]

Because it is the mighty, mighty dollar!

Seriously though, the dollar is not going to become worthless. It might continue to slide a bit more but I think most of you are severly understimating the strength of the U.S. Economy and the strength of the country in general, long-term.

Get greedy when others are fearful.

[DcifrThs]

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Because it is the mighty, mighty dollar!

Seriously though, the dollar is not going to become worthless. It might continue to slide a bit more but I think most of you are severly understimating the strength of the U.S. Economy and the strength of the country in general, long-term.

Get greedy when others are fearful.

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to be fair, the US dollar is a fundamental nightmare.

one of the major things a number of fantastic macro hedge fund managers do is sort out countries by deficits/surpluses.

from strongest to weakest:

dual surplus (fiscal and CA)
single surplus (CA)
single surplus (fiscal)
dual deficit (fiscal and CA)

the weakest countries are the ones whose currencies are the most fundamentally weak. the US is a dual deficit country in the extreme.

the good news is that the dollar is still viewed as a reserve currency and the US is a very attractive place to invest in terms of the stock market and financial innovation we've shown over the years.

further, the most recent GDP number (though very likely to be revised down) showed a huge increase in exports (in part thanks to the weak dollar obv). in 2007 Q3 exports of goods contributed 1.73% points to GDP. compare that with the 6 previous quarters of .50, .07, .73, .56, .49, and 1.1. actual RGDP growth in those quarters was 3.8, .6, 2.1, 1.1, 2.4, 4.8.

so overall the demand for US goods is quite large now and doesn't really show any signs of slowing (our biggest export markets are 1) canada ($161.7bil), 2) mexico ($90.5bil), 3) japan ($41.4 bil), and 4) china ($41.2 bil)

none of these countries (with the exception of japan) is showing any signs of economic weakness...and none of them is looking likely to reduce imports from the US.

NOTE: this is only as it relates to GDP. in the CA sense, we still have huge import/export issues though the actual deficit is falling...still very large though.

so net net, we have good and bad news. the problem si that the bad news is nowhere near being corrected by the good news. global imblaances (of which we are a major contributor) still persist and are only being corrected ina small way now. so the US being a still large dual deficit country is a bad thing for the US dollar long term.

Barron

[tolbiny]

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the US is a very attractive place to invest in terms of the stock market

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Linking things not on Mises for you barron

The US market has been one of the worst places to invest for the past five years, I wouldn't be on nominal highs fooling people forever.

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the good news is that the dollar is still viewed as a reserve currency

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This will not continue if the dollar continues to fall, switching over to the Euro or basket of currencies looks more attractive every day to those who do hold masses of dollars. China's sovereign wealth fund I believe is funded with US treasuries, other such slow burns are likely IMO over the next few years.

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further, the most recent GDP number (though very likely to be revised down) showed a huge increase in exports (in part thanks to the weak dollar obv).

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I keep hearing this and have not seen any attempts to calculate how much of the increase is from a weaker exchange rate, have you?

[DcifrThs]

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the US is a very attractive place to invest in terms of the stock market

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Linking things not on Mises for you barron

The US market has been one of the worst places to invest for the past five years, I wouldn't be on nominal highs fooling people forever.

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you misunderstand my point. i don't care abuot the returns of the US stock market, only the flows to it as it reflects upon the strength fo the dollar. this last TIC report did show huge outflows from US equities, but those coincided with the august credit crunch where equities allocations worldwide were seriously reduced. the point here is that even if the US has a bad year, or bad 3 years, it is still a huge compenent of global stock allocations.

the amount of money flowing to the US ('s equity markets) is still very large and helps prop up the dollar.

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the good news is that the dollar is still viewed as a reserve currency

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This will not continue if the dollar continues to fall, switching over to the Euro or basket of currencies looks more attractive every day to those who do hold masses of dollars. China's sovereign wealth fund I believe is funded with US treasuries, other such slow burns are likely IMO over the next few years.

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that is true but as of right now it is viewed as the world reserve currency and despite the "ease" of transition, the likelihood is another thing. care to make a wager as to whether the US will be the world reserve currency as of Jan 1, 2009?

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further, the most recent GDP number (though very likely to be revised down) showed a huge increase in exports (in part thanks to the weak dollar obv).

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I keep hearing this and have not seen any attempts to calculate how much of the increase is from a weaker exchange rate, have you?

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there are many studies that show when a currency weakens its exports increase in the same or following quarter relative to imports.

you can see vestiges of this in the import price index and export price index for our major trading partners.

a weak dollar definitely increases the relative demand for US exports.

with that being said, the relative amount attributed SOLELY to the weakness fo the US dollar is very hard to tease out and i haven't seen any well done papers/reports parsing the increase in export revenue as a % of GDP from a weakening of the dollar. so the amount i cannot quote.

but i can say with very high degree of confidence that "...huge increase in exports (in part thanks to the weak dollar obv)"

Barron