Alrroya – Resurrecting the dollar

Resurrecting the dollar
3 Mar 2010
If you are surprised about what happened to the dollar. There might be more to come.
If there was an indicator that could measure change of opinion like change of color, human beings would have replaced chameleons as the top color-changing creatures. Unfortunately this meter is not very popular. Who would want to know how unstable, mercurial he/she is when it comes to asset classes and their intermediate direction?
A Google search on dollar will get you featured articles with “is this the death of dollar” Jun 2009, “Dollar death warning” Oct 2008, “US dollar in crisis” Oct 2009, “The death of dollar is now inevitable”. The web was replete with images of a dollar note on fire, shrinking dollar and all the possible ways one could illustrate and mock the greenback. And we should not forget the youtube videos, the reputed magazines flocked to celebrate the demise of the dollar with successive cover page stories on the subject. It was an unrelenting deluge of “down with the dollar”. It seemed the world had got against the greenback. There was only one underdog in this story, the dollar.
Since I am travelling to Skopje next week, I did not want to miss Scorsese and took time out to visit Shutter Island. I did come out impressed and awed by the capability of the mind to build an illusion and, of course, portray it. We don’t need to be insane to build illusions. We can build traps in a real world. We can think our self to be geniuses, we can consume like royalty, and we can herd like sheep without having to visit an institution for the insane. The evidence that we as a society can build illusions is clear from the fact that all of dollar death stories emerged eight years after the dollar started falling from sub parity levels to the euro.
Being a contrarian is very hard. But extreme psychology, extreme sentiment benefits a contrarian. When the world is against the dollar, prices can assume to have more than discounted the future expectations. This is what fog the investors can’t see through. They are brain washed to believe that the “end is nigh”. The cycle of illusion repeats.
I have my illusions, but I try to be aware of this extreme sentiment. It was in this context I wrote “Why the dollar will always be important” Sep 1 2008. EURUSD ruled at 1.48. At that point of time, it all seemed naive and bold. I tried to explain then the influence of dollar on various assets and why understanding the dollar is as important as understanding commodities, equities, bond and economic cycles. The geographical bias, lack of inter-market knowledge, single asset focus and cycle blindness restrains our understanding of the dollar. The greenback had its days when it was as important as gold. We may have wanted to live without it, but the dollar is so much in our daily lives that it was never easy to dismiss the global cash proxy today.
Now that dollar has remained below 1.48 levels since Sep 2008 failing to move to trash status as anticipated, the sentiment starts to take a detour. This time, the society is talking about killing the euro. Blogs, social networks start talking about euro – dollar parity. Once a joke, the subject starts to be discussed freely. Now there are new gurus betting against the euro. A failed social experiment is what they call it. Sovereign risk and abandonment of currency by a few EU members does not seem a low probability event.
There is a visible shift to the anti-euro group. But we keep forgetting one basic rule that markets are cyclical. The world will never abandon the dollar and the dollar will always have value at a certain level, where it will surprise the fundamental knowledge and beliefs. Even if the euro is dying, there will the emergence of new bulls, efficient systems. What an investor should understand is that if one keeps selling the dollar, you are just making the counter asset stronger and vice versa. Unfortunately, markets are and always will be imbalanced. Market players try to balance one side, the other imbalances. This is the reason it’s an unyielding game of cash flow from one asset to the other. Assets never get destroyed, they come in and out of fancy according to their relative attractiveness (relative value).
Speaking about relative value between currencies, the British pound, Japanese Yen, Swiss Franc has more multi-week weakness to go against the dollar. But it’s the Canadian dollar (CAD) and Australian dollar (AUD) that suggest that it’s all not rosy on the commodity front and after any last upsides on precious metals, commodities and the respective commodity based currencies (AUD, CAD) will start multi-month underperformance against dollar. This means that the dollar resurrection has more to go, till the time last of the old bears on dollar change color, yet again.