Expect the dollar to keep falling--traders are betting on it

10/07/2009 12:30 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

It's a trade that will stay on until Asia's exporting economies cave in.

Currency traders are betting that the dollar will keep falling--on the huge U.S. debt, on U.S. economic recovery that's lagging Asian economies, and, not least, on their own bets against the dollar--until the Asian export economies are forced to let their currencies appreciate.

In effect, they're saying to the central banks of Korea, Taiwan, the Philippines, Singapore, Thailand, and China, We know that you're buying dollars to keep yor own currencies from appreciating. But we're betting that you can't keep it up.  No matter how much you want to keep the value of your currencies low so that your exports stay globally competitive. It's simply too expensive.

Bets like this tend to work--when the underlying fundamentals are strong enough to keep the pressure on month after month.It's one thing to step in to buy dollars, as the Korean central bank did on Tuesday October 6, on a one-day or short tem basis. It's quite another to keep spending reserves day after day with no end to the intervention in sight.

Despite intervention by the Korean central bank the won is up 8.2% against the U.S. dollar in the last three months. That's how strongly the current is flowing against the U.S. currency.

Traders betting against the dollar got a boost of confidence yesterday, October 6, when the Australian central bank raised short-term interest rates there by 0.25 percentage points to 3.25%. That move was equivalent to throwing in the towel on the battle to slow appreciation in the Australian dollar. On the news ,the Australian dollar roared ahead reaching its highest price against the dollar since August 2008. The Australian dollar is now up 21% against the U.S. dollar in 2009. 

The betting among currency traders is that the Norwegian central bank will be the next to raise rates. That would, of course, push the kroner even higher against the dollar.

Currency traders have been down this path before--and they know it can be extremely profitable.

In 1992 George Soros made a profit estimated at $1 billion betting that the United Kingdom would ultimately have to throw in the towel in its defense of the pound. The government spent $27 billion in what turned out to be a vain attempt to keep the price of the pound up so that the currency could remain part of the European Exchange Rate Mechanism. 

That effort at intervention ultimately failed when the government said "Enough."

This time currency traders are betting that they'll hear the same sounds of surrender from Asian central banks. Their profits won't be as large as those Soros made by shorting the pound but they will do quite nicely from the resulting appreciation of the won, the baht and the rest of Asia's trading currencies.

Trades like this, by the way, tend to stay in place until either they clearly aren't going to work or the profits have been booked.

I think the dollar faces more tough months ahead. Which will be good for the prices of commodities and commodity equities, especially those, such as Norway's Statoil Hydro (STO) that trade in strong currencies. For my September 23 buy of Statoil follow this link http://jubakpicks.com/2009/09/23/buy-statoil-hydro-sto/
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