Dump the US Dollar??

By: Andrew Abraham

Dump the US Dollar?
Why not? Everyone seems to hate the US dollars. Even a famous model recently came out and stated she wanted to be paid in any currency except the US Dollar. I did not know she was a recent graduate of Harvard Business School or Wharton with a degree in economics? Even George Soros explained why the dollar is collapsing in 2005 and he is a legendary currency trader. The Chinese government has begun a concerted campaign of verbal threats against the United States, hinting that it may liquidate its vast holding of US Treasury bonds if Washington imposes trade sanctions to force a Yuan revaluation. Rumors have it that Russia, Switzerland, OPEC members and several other countries have reduced their dollar holdings. Yes there are very strong reasons for the US dollars weakness... But it is very hard to make money following the crowd and acting on FEAR! In all my years of investing I have repeatedly seen the crowd acting out of fear and losing money. Everyone seems to have an opinion from our beautiful model to George Soros; the key is having a plan. Regardless of direction of the US Dollar have a plan. Any Hedge Fund or individual trader will tell you the US Dollar Index ( a basket of currencies that trade against the US Dollar) has trended and any simple trend following mechanical method or system would have been short the US DOLLAR INDEX ( We too were short the US DOLLAR INDEX). While the dollar has sunk to record lows against other major currencies, remarkably the Canadian dollar, Rupee, Euro and too many to mention the decline has been gradual. Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent versus the Euro and weakened 24 percent compared with the British pound. A view increasingly widespread among European politicians is that the Euro is too high as well the Chinese government who is reluctant to let markets push up the value of the Yuan. Today in Bloomberg there is an article stating that Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar. In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months.

The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high. The weaker dollar is a big help to the US economy, making U.S. exports more attractive at a time when consumer spending at home is slowing down and housing is a drag. Trade accounted for a full percentage point of the third quarter's 3.9% growth, and exports are buoying profits of many big U.S. companies. As in every situation there are always those who benefit such as the US exporters. However the pain is being felt elsewhere. U.S. sales for Hyundai Motor Co., South Korea's third-biggest exporter, may decline for the first time in nine years. Infosys Technologies Ltd., India's second-largest software exporter, cut its full-year earnings forecast on Oct. 11, blaming the rupee's 13 percent rise. The shares fell 24 percent this year. What about all those lovely products we like to spoil ourselves with such as Mercedes, BMW, Hermes and countless other products. Do you think they are exporting as many units as the prior years? When Henry Paulson became Treasury secretary 16 months ago, his response has been to repeat the mantra that a "strong dollar is in our nation's interest." Many have thought the US government and central bank would influence the US dollar, however their verbal remarks and attempts at intervention have been ineffective, largely because the markets are so large that governments can't really influence them -- outside of tightly controlled currencies like China's. The government hasn't many options if it wanted to arrest the decline. It could use stronger rhetoric to talk up the dollar (which so far has not worked). It could, in coordination with other countries troubled by the dollar decline, buy dollars in foreign-exchange markets. Or the Fed could raise interest rates, since money flows to countries with higher rates. Clinton's Treasury in August 1995, when the currency was falling even as the Fed raised rates. In April 1995 the US dollar index as at 79.05 and by July in 2001 the US Dollar was at 124.14. Then as now the US Dollar Index was grossly oversold. Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decisions being made in Beijing, Shanghai or Tokyo". She said foreign control over 44% of the US national debt had left America acutely vulnerable. The question is who would benefit if the US Dollar crashed? No major holder of US dollars, (China or OPEC members) will willingly send the dollar into dollar hell. Because if they do that they go too. It's that simple. They are damned if they do and damned if they don't. Not to mention the Chinese government which is attempting to rein in an overheated economy with a stock market bubble and avert a financial collapse. So what does one do? You are reading this to hear some ideas. Simply if one is US Dollar based it might be prudent do absolutely nothing. The reason being all your future expenses will be in US Dollars and to try to time the currency markets- Good Luck! The Canadian dollar for example was at 110.43 and is currently at 104.97. That is only a $5500 loss per $100,000 dollars in 4 days. If my last suggestion absolutely does not sit well with you and you have no problem buying into the current fear and doom...You could buy Gold- which is another fear story and today is down $14.00 and way over bought. Another idea is sell US Dollars and purchase a money market denominated in Euros or anything else you feel comfortable. If one is a non US entity and exports to the US (who doesn't) then maybe they should buy some currency insurance such as a forward contract or futures contract. Honestly my suggestion is that one should not make rash decision and not to react out of fear. Rather one should have a definitive plan that is delineated detailing where a trade or invest works or does not work. Being wrapped up in the moment it is hard to think clearly and the most possible conclusion would be a loss.
Andrew AbrahamAndrabr9@gmail.com
http://capitalinvestor1836.blogspot.com/

Money Management
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