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The Dollar Could Rally Some More

06/24/2009 12:56 pm EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says the dollar could move up some more in the short run but he has its doubts about its strength beyond that.

Last [month] we remarked on important, must-hold levels for the dollar—and hold they did. We now view the short-term trend for the dollar to be potentially up, but have deep reservations about the intermediate- to long-term outlook.

From a technical perspective, important support held and a well-defined bottom formation is now in place that has an initial goal of approximately 85 for the Dollar Index, currently [below 81]. That would represent a recovery of better than half the recent decline and about all we could expect on the up side if this is only a recovery swing.
There are several rays of light falling on the longer-term picture, but everything will have to play out perfectly for the bulls to prevail in any but the most temporal sense. One ray of light is the increased US savings rate. Another is American leadership, which is to say, that good old-fashioned American grit could take hold and we could work/earn/save our way out of this morass.

The current devaluation of the dollar began at the turn of the century. A triple top, or a sort of sloppy head and shoulders, formed over a year and a half. The first section was built at the end of 2000, the middle section in mid-2001, and the final section at the beginning of 2002.

The subsequent (Bush) devaluation ran 82 months, or 6.8 years, during which the trade-weighted basket that is the Dollar Index fell 43%. We are coming up on the first anniversary of the bear market low sitting midway between the recovery high and the bear market low. The bulls need the index to clear 90 while the bears are eyeing new lows beneath 72.

For now, we can only say that the first part of a potential transition from a bear market for the dollar to a bull market is in place; that there is at least potential fundamental justification for the transition; and that the competitive benefits of the devaluation may amount to an advantage.

The other side of the coin is huge deficits looming as far as the eye can see, an uncompetitive work force, an aging population, astonishing health care obligations, Social Security liabilities of astounding proportions, entitlements enough to impoverish all, entanglements in global wars with no foreseeable exits, energy prices that should soar, a compromised financial system... Blah, blah, blah, the litany of woes seems endless. Perhaps since all that is widely known and recognized, it may have been priced in already.

I am very leery of that analysis, since it was a similar conclusion about the credit crisis having been fully priced that led to my errant understanding of the bear market in equities. One must at least consider the proposition that the current administration is making things worse, not better. If so, then even the dollar's reserve currency status could be in jeopardy, never mind our credit rating.

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