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How long will the rally in the US dollar last?

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Last week the US dollar closed at $1.43 to the euro; $1.61 to the pound; 90 cents to the yen; and even 89 Aussie cents. The rally predicted a week ago has happened (see this article).

It is nice to be right for a change. The US dollar might also be an advanced signal of the correction in global equities that I have been so far less clever in anticipating since August.

For a shift out of riskier assets like stocks and into a short-term safe haven like the dollar will only intensify this ‘unexpected rally’.

Contrarian game

True to the contrarian game the dollar has reversed direction at the point when almost everybody thought the greenback was dead. At that point all the sellers had sold, and the only way was up.

Now the game has shifted to trying to weigh up how far the dollar will rally, and what this means for gold prices as an alternative safe haven for investors.

Having argued that global equities are well due for a correction for so many months that it has become boring then it will not be surprising to this analyst when it happens. Indian astrologers could already be flagging this up for as soon as tomorrow (see this article).

Rally to go higher

Presumably then the rally in the US dollar will be equal in strength to the depth of the stock market correction. I would simply contend that what has gone up so high will now fall with equal velocity. And that could mean the mispricing of equities is translated into a mispricing of the US dollar.

A strong dollar with a weak stock market and economy would then be the new anomaly, rather than a booming stock market in a recession struck US economy showing a few feeble signs of recovery.

Market distortions

This radical distortion of markets is all a part of the massive market interventions and stimulus packages since the financial crash of last autumn, and we should expect more. India has 20 per cent hyperinflation in food costs. This is a new trend to follow.

That is why I cannot get too worried about the gold price crash from $1,226 to $1,100 an ounce. Gold is going to keep its role as an inflation hedge even with a surging US dollar.

Besides how long will this strong dollar last? Only until the bond market falls over because investors demand more interest on their money as inflation takes off.

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Written by Peter Cooper

December 20, 2009 at 11:29 am

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