FOREX

Investors riding the weak-dollar wave could be trading today's gains for tomorrow's losses if the greenback's slide outweighs investment gains elsewhere.

CNBC.com

Last week's Federal Reserve pledge to keep pumping money into the US economy was interpreted to mean future policies that would weaken the US currency. That in turn set off a wave of dollar selling that has been accompanied by a modest rise in stocks, new historical highs in gold and a substantial drop in Treasury yields.

Wall Street chatter increased Friday when noted hedge fund manager David Tepper told CNBC that risk assets would rise in the future regardless of economic performance as long as the Fed was waiting on the sidelines to intervene.

The resulting loss in the dollar has been greeted less than enthusiastically by those who doubt the US economy can recover without a strong currency. Investors have thus rushed to gold [US@GC.1 1307.2 -1.30 (-0.1%) ], sending the metal's price up 2.6 percent in the past 10 days to a new record high past the $1,300 an ounce psychological watermark.

"Gold is the best asset to see exactly what's going on as far as dollar depreciation," says Michael Pento, senior economist at Euro Pacific Capital in New York. "That's telling me quite clearly the country is losing purchasing power. Gold is setting a record high nearly every day now. That tells me (Fed Chairman Ben) Bernanke is very successful in destroying savings, destroying wealth for retirees and making the entire nation poorer."

Pento believes investors who follow the notion that all asset classes will rise because of Fed intervention are ignoring the difference between nominal and real gains. The former term refers to the actual dollar price of an asset, while the latter compares the gains realized versus their actual worth compared to the drop in value of the dollar.

Jeff Cox
Staff Writer
CNBC.com

Since the Sept. 21 Fed statement—considered to be a harbinger for a second round of quantitative easing, or money-printing—the Standard & Poor's 500 [.SPX 1144.73 -2.97 (-0.26%) ] has gained incrementally (about 0.04 percent), while the dollar index, which measures the greenback against a basket of foreign currencies, has fallen 3.3 percent.

The dollar's plunge has fueled worries of a global trade war as weak economies race to the bottom in devaluing their currencies. The dollar, though, seems to be taking the hardest hit as belief fades that US policymakers will defend it.

"We are witnessing a full, frontal, material and joint assault upon the dollar and sadly it appears that the best the dollar can do is 'bounce' for a day or two or three before the assault shall begin anew," wrote hedge fund manager Dennis Gartman in his Gartman Letter on Wednesday.

For investors, choices lie between playing the weak dollar and hoping for adequate asset appreciation, or taking outright bets against it in the form of other currencies, hard assets like gold, or in selected stocks of companies—multinationals and miners to name two sectors—that can withstand such an environment.

"If the dollar is going down faster than the market is going up, I know I'm losing money. The gains are only nominal in nature," Pento says. "When the Fed starts their next round of quantitative easing and expansion of the balance sheet, all assets will rise but some will rise a lot less than others."

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Pento says the best bets will be in commodities, "companies that pull stuff out of the ground," and various countries where central banks are defending their currencies, such as Australia and Canada.

With the fickle nature of a trading-range market, though, the dollar's move is unlikely to come in a straight line.

Among the market's favorite buzz terms now are "risk-on, risk-off" in describing the strongly uniform moves of all risk assets—either everything is going up on risk-on days, or everything is falling on risk-off days.

"This is all due to direct speculation of the Fed, with QE2 and QE lite," Cliff Draughn, president and CIO of Excelsia Investment Advisors, said in a CNBC interview. "Every time there's speculation that the Fed is increasing or doing QE2 to a large-scale measure, it's risk-on for investors and that results in a decline for the dollar."

Draughn favors multinational companies, also in Canada and Australia, as well as Brazil. He's also a gold advocate, which he says has "become a currency as opposed to an inflation hedge."

Others are being a bit more careful amid worries that the gold trade could be topping out.

"You have to be selective. What we did was add to our basic materials and industrials last month when the market was weakening and investors were worrying about a double-dip," Alan Lancz, president of Alan B. Lancz and Associates, said in the same interview.

"Now that the market has surged in September it's time for investors to get a little more defensive. So I think instead of chasing gold and commodities, I'd rather look at exiting points as it moves up. It's a little bit of a different strategy—more preservation of capital-oriented rather than chasing performance."

But what if the dollar doesn't keep moving lower?

The US currency is nearing its 2010 lows and is at a level not seen since January. The overly bearish sentiment could be setting up a dollar rally, says Christian Tharp, chief technical analyst at Adam Mesh Trading Group in New York.

"When you get into these extreme bearish or bullish situations, that tends to be ... a sign that the reversal is near," he says. "I'm expecting the dollar to stabilize here soon and probably a pretty substantial rise from here."

Tharp primarily uses ETFs to play currencies and currently favors the PowerShares Deutsche Bank Dollar Bull Fund [UUP 22.84 -0.04 (-0.17%) ].

But if he's wrong and the dollar continues to fall, investors could have a big headache on their hands of a different sort.

"You can buy the S&P 500. That may increase a few small percentage points. If the dollar is going to lose 10 percent of its value, you're way behind the curve," Pento says. "You have to buy something that's going to perform better than that."

Blackstone CEO: Worst over, Future Is Brighter BLACKSTONE, WORST, FUTURE, ECONOMY, CRISIS, RECESSION, DEPRESSION, INDUSTRY, IPO, STOCK MARKET Reuters
| 14 Oct 2009 | 04:05 AM ET

Private equity firm Blackstone Group's chief executive said the worst of the industry's slump is behind it, and dealflow and IPO investments are opening up again."We've all been through a trying period," Stephen Schwarzman said on Wednesday in a speech at the Super Return Middle East private equity conference in Dubai.The future looks brighter and he is seeing "more than green shoots" of recovery, though the scale of economic growth through next year is still unclear."We do not expect the U.S. economy to slip back into recession, but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011,"Schwarzman said.He is evaluating the prospects for up to seven IPOs, in addition to one already filed, which he said were spread across a variety of sectors and geographies.There are also signs of life in the bank financing market, he said."We can certainly do transactions in the $3 billion to $4 billion range at this stage in the cycle," he said on the sidelines of the conference.
"And with low leverage involved, deals of that size can use in excess of $1 billion equity." Schwarzman sees the opportunity for more deals ahead but noted Blackstone had been outbid by strategics ? meaning companies rather than private equity firms ? on several occasions.He said Blackstone is open to investing in the Middle East and sees the firm opening an office somewhere in the region. He declined to specify which city.Schwarzman earlier made some of the details of his speech available to investors in Blackstone's funds.

Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency,Sumitomo Mitsui Banking Corp.'s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

"The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,"said Daisuke Uno at Sumitomo Mitsui, a unit of Japan's third- biggest bank. "The dollar's fall won't stop until there's a change to the global currency system." The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to 75.276 today, the lowest since August 2008. The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen. "We can no longer stop the big wave of dollar weakness," Uno said. If the U.S. currency breaks through record levels, "there will be no downside limit, and even coordinated intervention won't work," he said. China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran's deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran's foreign reserves.

The greenback is heading for the trough of a super-cycle that started in August 1971, Uno said, referring to the Elliot Wave theory, which holds that market swings follow a predictable five-stage pattern of three steps forward, two steps back. The dollar is now at wave five of the 40-year cycle, Uno said. It dropped to 92 yen during wave one that ended in March 1973. The dollar will target 50 yen during the current wave, based on multiplying 92 with 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 yen level seen in the second quarter of 2007, according to Uno. The Elliot Wave was developed by accountant Ralph Nelson Elliott during the Great Depression. Wave sizes are often related by a series of numbers known as the Fibonacci sequence, pioneered by 13th century mathematician Leonardo Pisano, who discerned them from proportions found in nature. Uno said after the dollar loses its reserve currency status, the U.S., Europe and Asia will form separate economic blocs. The International Monetary Fund's special drawing rights may be used as a temporary measure, and global currency trading will shrink in the long run, he said.

By JUDY SHELTON
Unprecedented spending, unending fiscal deficits, unconscionable accumulations of government debt: These are the trends that are shaping America's financial future. And since loose monetary policy and a weak U.S. dollar are part of the mix, apparently, it's no wonder people around the world are searching for an alternative form of money in which to calculate and preserve their own wealth.

It may be too soon to dismiss the dollar as an utterly debauched currency. It still is the most used for international transactions and constitutes over 60% of other countries' official foreign-exchange reserves. But the reputation of our nation's money is being severely compromised.

Funny how words normally used to address issues of morality come to the fore when judging the qualities of the dollar. Perhaps it's because the U.S. has long represented the virtues of democratic capitalism. To be "sound as a dollar" is to be deemed trustworthy, dependable, and in good working condition.

It used to mean all that, anyway. But as the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade. Who wants to accumulate assets denominated in a shrinking unit of account? Excess government spending leads to inflation, and inflation plays dollar savers for patsies—both at home and abroad.

A return to sound financial principles in Washington, D.C., would signal that America still believes it can restore the integrity of the dollar and provide leadership for the global economy. But for all the talk from the Obama administration about the need to exert fiscal discipline—the president's 10-year federal budget is subtitled "A New Era of Responsibility: Renewing America's Promise"—the projected budget numbers anticipate a permanent pattern of deficit spending and vastly higher levels of outstanding federal debt.

Even with the optimistic economic assumptions implicit in the Obama administration's budget, it's a mathematical impossibility to reduce debt if you continue to spend more than you take in. Mr. Obama promises to lower the deficit from its current 9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014, and an average 4% of GDP for the years 2015-2019. All of this presupposes no unforeseen expenditures such as a second "stimulus" package or additional costs related to health-care reform. But even if the deficit shrinks as a percentage of GDP, it's still a deficit. It adds to the amount of our nation's outstanding indebtedness, which reflects the cumulative total of annual budget deficits.

By the end of 2019, according to the administration's budget numbers, our federal debt will reach $23.3 trillion—as compared to $11.9 trillion today. To put it in perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew to 70.2% of GDP in 2008 (under the Bush administration); it will climb to an estimated 90.4% this year and touch the 100% mark in 2011, after which the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019.

The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio (which measures the debt burden against a nation's capacity to generate sufficient wealth to repay its creditors). In 2008, the U.S. ranked 23rd on the list—crossing the 100% threshold vaults our nation into seventh place.

If you were a foreign government, would you want to increase your holdings of Treasury securities knowing the U.S. government has no plans to balance its budget during the next decade, let alone achieve a surplus?

In the European Union, countries wishing to adopt the euro must first limit government debt to 60% of GDP. It's the reference criterion for demonstrating "soundness and sustainability of public finances." Politicians find it all too tempting to print money—something the Europeans have understood since the days of the Weimar Republic—and excessive government borrowing poses a threat to monetary stability.

Valuable lessons can also be drawn from Japan's unsuccessful experiment with quantitative easing in the aftermath of its ruptured 1980s bubble economy. The Bank of Japan's desperate efforts to fight deflation through a zero-interest rate policy aimed at bailing out zombie companies, along with massive budget deficit spending, only contributed to a lost decade of stagnant growth. Japan's government debt-to-GDP ratio escalated to more than 170% now from 65% in 1990. Over the same period, the yen's use as an international reserve currency—it clings to fourth place behind the dollar, euro and pound sterling—declined from comprising 10.2% of official foreign-exchange reserves to 3.3% today.

The U.S. has long served as the world's "indispensable nation" and the dollar's primary role in the global economy has likewise seemed to testify to American exceptionalism. But the passivity in Washington toward our dismal fiscal future, and its inevitable toll on U.S. economic influence, suggests that American global leadership is no longer a priority and that America's money cannot be trusted.

If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. It's why oil-producing Gulf States are fretting over whether to continue pricing energy exports in depreciated dollars. It's why central banks around the world are dumping dollars in favor of alternative currencies, even as reduced global demand exacerbates the dollar's decline. Until the U.S. sends convincing signals that it believes in a strong dollar—mere rhetorical assertions ring hollow—the world has little reason to hold dollar-denominated securities.

Sadly, due to our fiscal quagmire, the Federal Reserve may be forced to raise interest rates as a sop to attract foreign capital even if it hurts our domestic economy. Unfortunately, that's the price of having already succumbed to symbiotic fiscal and monetary policy. If we could forge a genuine commitment to private-sector economic growth by reducing taxes, and at the same time significantly cut future spending, it might be possible to turn things around. Under President Reagan in the 1980s, Fed Chairman Paul Volcker slashed inflation and strengthened the dollar by dramatically tightening credit. Though it was a painful process, the economy ultimately boomed.

Whether the U.S. can once more summon the resolve to address its problems is an open question. But the world's growing dollar disdain conveys a message: Issuing more promissory notes is not the way to renew America's promise.

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

Enjoying the Weak Dollar?

You Could Live to Regret It

Enjoying the Weak Dollar? You Could Live to Regret It

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