Today, we open the paper. We connect to the Internet. We look to see what has happened in the financial world.
Stocks rallied last week. The dollar fell.
Analysts blamed the fall on a rate cut they said was likely this week.
What more can we say about this? Will the Fed cut rates? Will the dollar fall further? Will gold hit US$800? US$900…or more?
The answer to all these questions is, “Yes, of course.”
It is the timing we are uncertain about.
It makes us nervous to see so many negative comments on the dollar. Yes, the greenback is going down. But things never tend to work as neatly as we expect. It’s hard to believe that speculators haven’t already caught on to the dollar’s fall. It’s hard to believe they haven’t gotten ahead of it.
Most people, however, are long the dollar…not short. They’re holding US dollar assets because they believe they can earn a positive, safe return on them. Or because they earn dollars. Or because they spend dollars. Many speculators borrow yen or Swiss francs, exchange the money for dollars, and buy dollar assets. If the dollar falls, they lose money. But they’re convinced the dollar will go back up. In fact, a Bloomberg survey tells us that the median forecast for the dollar is that it will soon return to US$1.40 per euro, rather than today’s US$1.43.
How do they remain so bullish? US stocks are up this year…but they are still among the worst performing in the world. The dollar is down 8% against its major trading partners. And now the foreigners are nagging us about our subprime problems…and how we’re a threat to the entire global economy.
There are always surprises. It would be a surprise to many to see the dollar rally. But it might be even a bigger surprise to see it collapse. Among all the forecasts we’ve read almost all call for a gentle decline of the US currency…leading to strong exports from America to the rest of the world. But what if the big surprise was that the dollar suddenly dropped to US$1.50 per euro…and the price of gold shot up over US$1,000?
We’re not predicting it, dear reader. Many times we’ve tried to look into the future, but we’ve never got the hang of it. So, we just take it as it comes along with everyone else.
But what a shock it would be!
The Daily Reckoning Australia