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Thursday, October 04, 2007

Gaming the US Dollar

Falling oil prices and dovish outlooks from European and British Central Banks, as well as a generally oversold condition, are the wind beneath the US dollar's wings. But dollar bulls shouldn't get too comfortable. Let's look at the chart ...

We can see the US dollar is rising from oversold, but even now it is running into first resistance from its old downtrend. There are many more resistance levels above that.

Fundamentally, the dollar is also under pressure from, of all places, Qatar and Vietnam. Read this story in the Daily Telegraph:

Some highlights:

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets ... Vietnam, which has mid-sized reserves of $40 billion, is seen as weather vane for the bigger Asian powers.

... snip ...

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99% to 40%, switching into investments in China, Japan, and emerging Asia ... The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3,500 billion under management may pull the plug on the heavily endebted US economy -- which needs to suck in the majority of the world's savings just to stay afloat.

Here's what I would recommend -- use this bounce in the US dollar to add more silver and gold to your positions. Oil positions should well also, because oil and the US dollar are NEGATIVELY correlated 86% of the time. Finally, as I mentioned in my column two weeks ago, "Crouching Dollar, Golden Opportunity", foreign stocks and ETFs containing stocks that are based in foreign currencies will help insulate you from the shrinking US dollar and shrinking US assets.

Despite the bad news from Qatar and Vietnam, I would expect momentum to propel the US dollar to at least Resistance Level 3 (the recent downtrend). That might be a good time to start adding new positions -- don't go whole hog, but ease in gradually.

And do you know what a falling US dollar will be good for? Large-cap US stocks. Since they make a lot of money overseas, a falling US dollar will fatten their bottom lines. Of course, that could be derailed by a US recession or by foreigners sucking their money out of US investments because they are sick of the shrinking dollar shrinking their assets.

UPDATE: Oct. 4 (Bloomberg) -- Gold rose as the dollar ended athree-day rally against the euro, bolstering the appeal of the precious metal as an alternative investment. Silver fell. The dollar weakened after a report showed U.S. factory orders fell in August by the most in seven months, raising the prospect that the Federal Reserve will cut interest rates for asecond time this year. Before today, gold climbed 15 percent this year as the dollar slid 6.8 percent against the euro.


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