Rebound for the Greenback

05/14/2008 12:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Mary Anne and Pamela Aden, editors of The Aden Forecast, say that the dollar is ready to take a breather and gain against some of the stronger currencies-at least for a while.

After falling nearly nonstop since last year to a record low, and following its biggest quarterly decline against the euro in four years, the dollar now appears to be bottoming-at least temporarily.

This, however, doesn't change anything. The dollar's in a mega-decline. It has been for the past 36 years, and there's every reason to believe this trend will continue. Within this mega-decline, the dollar's been falling in its current drop since 2001. In fact, this drop has been so intense that when former [Federal Reserve chairman] Paul Volcker was asked if he predicts a dollar crisis, he said, "You don't have to predict it; you're in it."

But no market goes straight up or straight down, and the dollar is not an exception. So, even though the US now has the lowest interest rates compared to other major countries, the US dollar is currently poised to rise.

Why? The dollar is obviously anticipating that interest rates are near a bottom and they'll soon start moving up. A rising dollar also suggests better times ahead. Like the stock market, the dollar is beginning to signal that the housing situation won't be that bad and the economy will make it through okay.

And while the dollar's major trend remains down, it's only normal that the dollar will occasionally move up in a rebound rise within its down trend. Basically, any market will eventually reach a point of exhaustion when it's very oversold. That's the case with the dollar now, so it'll likely move up, regardless of all the reasons why it shouldn't.

Okay, so if the dollar is temporarily headed higher, then the currencies we've been recommending are going to go lower. These markets have done very well and we still like them. As we've discussed many times, investing in the strongest currencies provides a great way to defend yourself against inflation, and the ongoing deterioration and depreciation in the US dollar.

But these currencies have risen far and fast, which means they're due for a breather. In other words, they could settle down near current levels, but it would not be unusual if they were to decline further. And while we don't expect the currencies to fall that far, if they do, the markets will still be bullish and the major trends will remain up.

For now, we advise selling some of the weaker currencies like the Japanese yen [and the] Canadian and New Zealand dollars. But continue to hold a core 10% position in the stronger currencies-the euro, Swiss franc, Singapore and Australian dollars.

These currencies will keep benefiting from high interest rates and with inflation now picking up worldwide, most countries will be hesitant to lower their interest rates. That, too, will keep a strong foundation under the [strong] currencies. So, stay with the major trend.

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