How soon will we see the dollar break to downside?

Ernie from Dollarton


Ernie, my simple answer is I have no idea. You might as well have asked, when will we see the dollar break to the upside, or when will gold top $1,000, or when will the DJIA hit 10,000. My point is that no one can answer these questions with any certainty. If anyone could, if I could for that matter, then I would be sitting on a beach in the Bahamas phoning in my answers to my readers’ questions.

What traders do (aside from seeking information from others) is collect the best evidence they can find and then draw some type of conclusion about market direction from that evidence. The problem comes with the sheer volume of evidence, and the often conflicting evidence that surrounds just about every market. The U.S. dollar is no exception. If you were to have two top forex experts sit down to answer the above question, more than likely you would get two different answers. So what do you do?

The first thing with any market is to understand the macro picture. In the case of the dollar, the macro picture is quite huge indeed. Number one, it is still the world’s reserve currency. Number two, it is under great pressure from other currencies, specifically because of the U.S. debt and the policies of the Federal Reserve. Number three, oil is traded in U.S. dollars. Number four, gold has risen to almost record highs and remains high. Number five, the U.S. economy is only beginning to recover from the worst financial debacle since the Great Depression, and a recession that began in December 2007. Number six, the European Union is now on par with the U.S. in terms of GDP. Finally, you can take the individual economies of Japan, China, Germany, and France, combine them and they still will not equal the GDP of the U.S.

Now, what have we learned from the macro picture? By any measure, the dollar is challenged and recovery as the world currency leader, if it happens, will take some time. On the other hand, the U.S. economy is so massive and resilient, it is hard to strongly bet against the dollar regaining its glory. Thus, when will the dollar weaken further? Let’s ask two forex experts and see what they say.

Trade in the day; invest in your life …

Trader Ed