The Dollar's Demise Delayed

06/10/2010 12:00 pm EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of the Aden Forecast, say the US dollar may continue strong for a while, but ultimately it will continue its decades-long decline.

The US dollar [has] surged on safe-haven buying as investors shunned anything considered high risk.

As you’d expect, the euro has suffered the most, falling to a four-year low. It was hit by one debt woe after another. The euro’s been glob­ally considered the offset currency to the US dollar. But now that it’s plunging, everyone seems to be hav­ing second thoughts.

Concern is growing that the European aid package won’t be enough, the strain could put an end to their economic recovery, and/or the euro zone may simply break up, taking the euro along with it.
 
As we’ve often noted, throughout the history of the world not one paper currency has sur­vived. Considering this long-term track record, we’re sure the dollar, the euro, and all of the other fiat paper currencies currently in existence will follow the same path. But is it happening now?

It will eventually happen, and the process has already likely started, but these things take time. More likely, for at least a few more years, investors will turn from one currency to another.

This decade, for instance, the US dollar steadily declined. As it did, investors moved out of the dollar and into the euro, the other European currencies, [and] the commodity currencies (Australian, Canadian, and New Zealand dol­lars). Now, the oppo­site is taking place.

As nervousness grows, investors have been moving back into the US dollar. This happened during the financial meltdown in 2008, and it’s now hap­pening again. The dollar is currently strong and it’s gaining momentum, recently hitting a 15-month high.

More important, the dollar index has risen and stayed above its mega-trend moving average. This is a big deal, because if it now stays above it at 83.35, then the dollar is likely going much higher, similar to what happened in the late 1990s. (It traded above 88 Wednesday—Editor.)

But the dollar’s been on the skids for the past 40 years. The US is by far the world’s largest debtor nation, and it’s borrowing and spend­ing its future for as far as the eye can see. We know that in time the funda­mentals will overpower the dollar’s strength.

For now, [though,] investors have em­braced the dollar as the safe-haven currency, and fears of a 2008 repeat are probably the main reason why. But while the dollar could stay firm a while lon­ger, its rise is unlikely to be a long-lasting one.

By the same token, the euro is extremely weak. But here, too, its indicator is at a major low area, which means it may be near a bot­tom, at least temporarily, and it’s due for some sort of rebound rise.

If you have Australian and Ca­nadian dollars, keep them for the time being but be prepared to sell, hopefully on a rebound rise. Do not buy new foreign currency positions and/or currency funds. If you have US dollars, keep them.

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