Mister Dollar and the Fickle Market

Here are some comments I gave a small group of readers last night on the US dollar ...

The once-mighty US dollar traded to a new record low against the euro on Monday, and also drifted lower against the yen. See the following chart ...

Moves in the greenback are having a big effect on other commodities, and sentiment has turned against the US dollar very quickly. Because the market is a fickle beast, this is actually prime breeding grounds for a US dollar rally, so don’t be surprised if you see the greenback go higher. But any rally could be viewed an opportunity to get short the dollar and long precious metals.

Why? Well, the US dollar seems to be facing rejection on a global scale – and that is a sure sign of more trouble ahead. The flow of funds into the euro and other currencies is signaling a lack of faith in the US economy which is burdened with A) a humongous (and growing) Federal deficit compounded by B) the high cost of Iraq C) swooning real estate prices D) a soft economic forecast. The US dollar could be facing problems that will make the sub-prime crisis look like a cakewalk.

What’s more, now that the Fed cut interest rates, investors are starting to wonder why they should hold the dollar. The Fed is likely to cut again, so you’re certainly not holding it for rising yields.

Still, nothing travels in a straight line, and we could see a sizeable rally in the dollar if sentiment gets too bearish too quickly. Will these rallies be tradeable? We’ll see. Use a good two-or-three day rally to get long gold or silver, and you probably won’t be sorry. Also, a falling dollar makes US agricultural goods more affordable for overseas buyers – the bull market in grains should not only continue, it could accelerate.

Update: As I write this, the US dollar is up and gold is down $9 per ounce. Give it another couple days, and it might be time to buy gold again. My subscribers should stay tuned for updates.

Update II: I wrote that post early this morning and let it sit before publishing it. Now, I checked and the US dollar is down again! And gold is up! I'm leaving this post up here to remind myself not to post before the rest of the market wakes up.

Check out my new gold and energy blog at MoneyAndMarkets.com