Where goes the Greenback?

Inspired by the recent Jim Rogers interview where he claims to have 'more US dollars today' than he did a short time back, this post explores the likelihood of the Greenback's imminent rally as implied by his statement.



As you can see from the monthly chart against the S$, there is a strong technical case to be made in favour of Roger's unusual decision to go long the dollar for the short-to-medium term:

1. A strong support at the 1.36-1.40 band established by the US$ plumbing lows in 1995 prior to the Asian Financial Crisis of '97-'98.

What I surmise is that from the early 90s to 1995-'96, US money was flooding into emerging markets and especially Asian equity markets as the 'Asia Rising'-themed growth story was widely bought back then. The speed and ferocity of the '97 currency crisis, which was touched off by Thailand, snowballed throughout that year, and send the US$ up by about 30% from 1.40 to 1.82 against the S$, a relatively stable and safe currency(as against a rise of 580% against the volatile Indonesian rupiah!).

Since then, a more pernicuous & pervasive crisis built up in the US itself, which culminated first in the bursting of the Dot.com bubble, & then the channelling of those funds back towards emerging markets from '01-'07, and towards the euphoric phase of the real-estate bubble there, fueled by the Greenspan largesse, as he flipped the interest rate switch to 'ridiculously low' after 9/11.

The '08 Credit Quake caused a sharp reversal from a 1.345 low to 1.555 by March '09 as hedge funds and others mindlessly piled into US Treasury bonds, but the Dollar has since reversed in inverse proportion to a equity and commodity rally since then to touch 1.38 recently.

Having the same conviction as I did when I bought some Dollars at 1.360 on June 24th 2008(which I subsequently sold as it rallied), I made a trip to Singapore recently to do the same, buying some at 1.389, some HK$ for 5.56 and some Chinese renminbi too(the latter two being effectively pegged to the Dollar at the moment).

The downtrend line indicates that the Dollar is still in a secular bear market, which Rogers believes(and Marc Faber would swear to) will eventually result in a total collapse of the dollar.

Although I doubt the Dollar will go the way of its Zimbabwean counterpart(of the 100 Billion dollar note for 3 eggs fame), I believe the only two investment gurus I really listen to these days.

But the fact that Rogers believes the Dollar will embark on a multi-month rally soon gives greater credence to the Greenback's rebound.

Japanese candlestick theory also points to a likely bottom on the weekly chart(not shown here)

2. The Dollar carry trade, that has,in my opinion, been responsible for the bulk of the rise in equities and commodities in '09,could be unwound soon.

A similar unwinding of the Yen carry trade was UGLY in '08, and such an unwinding of the Dollar carry trade could potentially be just as disorderly(and may be chaotic).