A reader left a comment wondering if the dollar can possibly go up in the next few years, everyone says it is going to go down. The reader raises the possibility of taking the other side of this trade and going long the dollar one way or another.
Fundamentally there is absolutely no question the dollar should go down. This has been the case for a while and will likely continue to be the case for the foreseeable future. Just because it should go down is no reason that it would go down. Should and would are two different concepts and the two diverge regularly.
As far as taking action to fade a dollar decline; I guess I would ask how it fits in with your portfolio and financial plan. If the idea behind the idea is to speculate that the consensus will be wrong; is the type of trade you usually do? If the idea behind the idea is a counter strategy of some sort; is this the type of hedging you normally do?
My use of currency ETFs for clients is about diversifying the cash portion of the stocks/bonds/cash allocation. As I am a US based, mostly equity, investor I feel very little need to go long the dollar.
From the above you might conclude I am saying to always go with the crowd but I am not. The fact is the currency market is a different animal than the stock and bond markets. Most active market participants are better suited to fading consensus in the stock market than with currencies at least I feel that way about my own investing.
If the reader in question is new to currencies and feels that he has to do the trade I would urge moderation; start small. To be clear this is not a trade I will be doing.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
10 comments:
fwiw, trading currencies is for a specialized breed,so is my perception. odds are better with other assets. when i look at a dollar index chart, not too hard to see a case for the dollar moving up to retest trend, and then who knows, maybe a breakout, or not.
For most of us I think increasing or decreasing your exposure to equities from countries with strong currencies is a better plan for the future.
Roger, appreciate the article. Very good stuff.
Roger makes a great point about investing, that cannot be repeated enought: the markets can defy what seems like conventional wisdom for a long time.
As an investor, not a speculator, I do not personally trade currencies or currency ETFs. But if I did, I would not bet against the US dollar. In a world of fiat currencies, the world's reserve currency is the place to be over the long term. That would be the USD with no close second.
That, as they say, is what makes a market.
Russ.
Correct me if I'm wrong, but isn't the American dollar also fiat money? Isn't it just printed on paper and back by nothing tangible?
I know that the dollar is backed by the promise of the American government, and it's what makes the buck so strong. But since the dollar is no longer backed by either gold or silver I thought that technically it also was fiat money.
Or are you saying that some money is more or less fiat that other currencies?
The US Dollar is definetely a fiat currency. My point is that in a world of fiat currencies, most nations turn to the USD as their currency of choice. Many countries tied their currency directly or indirectly to ours. In other countries, the citizens simply deal in US Dollars. The US Fed is a disaster, but our dollar is still a better choice than the currencies of most other countries.
I've been toying with the idea of going long on a small USD position as part of a contrarian strategy. There's a lot of evidence that systematically betting counter to 3-5 year asset class winners/losers works. Of course I would do this in very small positions because of the speculative nature of this concept.
Shorting GLD looks like another play if you agree with long term the reversion to the mean anomaly.
30 year chart
http://goldprice.org/30-year-gold-price-history.html
The dollar can, of course, go both up and down at the same time. It depends on what you bet against.
Since the beginning of last year, the dollar is down about 8% (including carry) versus the euro. However, it's up about 8% (including carry) against the yen.
It's down against the Chinese renminbi. It's up against the Taiwan and Hong Kong dollars.
My advice: know what you're getting into before you bet. I can tell you from bitter experience that there is no worse feeling than being long (short) dollars and watch it go up (down) against just about everything except what you are long (short) against.
I would probably use RDPIX which attempts to match the USDX. Here are the components of USDX:
http://www.babypips.com/school/the_usdx_components.html
Post a Comment