Not Betting on the Dollar

08/14/2008 12:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden peer beneath the recent dollar rise, telling investors the case is still bearish.

The strength of the dollar's rise came as a surprise, especially since both its current and future fundamentals are extremely bearish.

Traders were focused on the oil price and as it fell sharply, the dollar headed higher. The housing bailout, and the Fannie Mae and Freddie Mac rescue also boosted the dollar. The bullish feeling was that the banks will ultimately survive the credit and mortgage market losses.

The risk of higher inflation was also seen as a plus because it'll eventually result in higher interest rates, making the dollar more attractive. Normally, currencies rise because they have sound economic fundamentals backing them up, like a positive cash surplus and so on. Another big advantage is high interest rates, but the dollar has neither of these factors going for it.

Nevertheless, at this point we have to say. so what? Sometimes a market will rise or fall for no apparent reason at all. Far more important is the major trend. The biggest mistake an investor can make is to fight the major trend. But that's where the technicals come in.

The dollar has been in a long-term decline since 2001. That is the major trend and it's clearly down. But within this major downtrend, the dollar has moved up at times in a rebound rise, which is normal. For now, it would not be unusual for the dollar index to resist near the 76.50 level, which is its 65-week moving average. But should it rise and stay above this average, like it did in 2005, then it could possibly continue up to as high as its 40-month average at 83. This moving average identifies the major mega trend and the dollar will remain bearish, meaning it'll eventually fall further, by staying below that level.

Sooner or later, the fundamentals will win out and this dollar rebound will likely end the same way the others have, because absolutely nothing has changed. In fact, the dollar's economic fundamentals have gotten much worse. Ongoing spending means the deficits will continue to soar and these new housing guarantees pretty much guarantee more of the same, including an ongoing dollar drop.

We know the US is the world's largest debtor nation. But its trade deficit is completely out of whack compared to the rest of the world. This represents the biggest transfer of wealth in history, thanks in large part to US dependence on foreign oil. It also represents one of the main factors that'll drive the dollar to much lower levels.

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