The Dollar Bottoming



Jack Crooks takes a closer at the dollar and how it may slide lower or possibly rally against other currencies. Mr. Crooks examines the two possible future outcomes for the dollar and why each could occur.

Despite still strong evidence to the contrary, there is compelling logic to suggest that the dollar has bottomed. And if that is the case, a sustained rally in the greenback would certainly present a rather lucrative proposition. But first, take a look at three bearish reasons why the dollar could continue to slide lower:

1. Interest rates are consistently one of the most powerful drivers in the currency market. Because currency trading is a relative game, comparing one currency against another, the interest rate differential is always a consideration. As a rule: the higher the rate of interest the more attractive the currency. Currently, interest rates are a net negative for the U.S. dollar. And the expectations of even more cuts by the Federal Reserve in order to stave off, or at least moderate, recession means the dollar will continue to lose out on the hot money wave of capital.

2. There's been no panic spike yet. Often the U.S. dollar will spike down when a bear market is ending, or spike up when a bull market is ending. This spike can be measured by the number of standard deviations from the mean. Based on research done by Credit Suisse, utilizing a six-month time frame to derive the mean trend and comparing the dollar against the euro to derive the degree of overbought or oversold, following is a look at the evidence suggesting the dollar is still not oversold enough yet:

- In March 1985: The start of a dollar bear market was 2.3 standard deviations overbought;

- In August 1992: The start of a dollar bear market was 2.4 standard deviations oversold;

- And recently, the start of a dollar bear market was 1.5 standard deviations oversold.

3. In the investment world there is often a big difference between what someone says and what someone does. Both can play a powerful role. Talking can impact sentiment, which can impact or lead to changes in trend. No doubt the positioning against the dollar is quite bearish (using the currency futures open interest as a guide). But it doesn't quite qualify as being at extreme levels for the major trend.

Now, look at three bullish catalysts which could spur a rally after the dollar puts in a bottom:

1. Fed Chairman Bernanke recently admitted the U.S. is either in or will enter recession. History shows, more often than not, that the dollar actually rallies during recessions. According to research by Adam Cole, RBC Capital Markets Head, and recently in FX Week magazine:

"Four of the last five recessions have been associated with USD appreciation. On average, the DXY dollar index has risen 3.4% during recessionary periods compared with an average fall of 1.2% over the whole 35-year period of floating exchange rates."

Mr. Cole cited the logical reasons for the buck to rally during recession:

- Markets are forward looking.

In short, this means all the bad news is already anticipated, and therefore priced in. Participants expect things to get better in the future and act accordingly.

- During downturns, markets reward central banks that are flexible and punish central banks that are slow to ease policy.

This is interesting and flies in the face of the argument that says the dollar can only rally once the Fed starts hiking or the European Central Bank starts cutting. Flexible monetary policy and real action are rewarded.

- The U.S. retains some residual status as a safe haven.

Despite ugly rumors to the contrary, the U.S. capital markets are still the deepest and most efficient in the world. It is why, despite the dollar bear market, America is still the place to park big pools of money in a world full of risk.

2. Toil and trouble are brewing across the Atlantic. The euro and British pound are growing increasingly ugly relative to the dollar. The key drivers of ugliness for both currencies is similar: exposure to credit market problems just like the U.S., falling retail sales, housing markets heading into bust stage. And, for the euro in particular, some countries face severe fiscal problems. All in all it's beginning to hammer growth in both the U.K. and across the Eurozone.

3. The buck appears extremely oversold on a daily and weekly basis. Key points to consider:

- The recent low would coincide with a major wave down, indicating the next move is up.

- There has been a major divergence in the price oscillators, i.e. the dollar put in a new all-time low, yet the relative strength index failed to make a new low. Often times, price action like that precedes a significant change of trend.

- For the first time since November 2005, the dollar index has pierced its downtrend channel, suggesting an extreme oversold reading.

"There are strong reasons on both sides of the argument as to whether or not the buck has bottomed. If push comes to shove, there is a high probability for a correction in the dollar, or decent rally higher," Mr. Crooks states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxNewsletterEntryId=1635

About JACK CROOKS & MONEY AND MARKETS     

John (Jack) Crooks is the founder and president of Black Swan Capital, an independent advisory firm specializing in foreign exchange and currency markets investing for retail and institutional clients. A seasoned financial advisory with nearly 20 years of investment experience, Mr. Crooks uses both quantitative and qualitative approaches to determine the fundamental driving force(s) behind the movement of the currency, capital, and commodities markets. He is the editor of Weiss Research's latest investment offerings, World Currency Alert and World Currency Options, which were launched in August 2007.

Mr. Crooks also founded Ross International Asset Management, a discretionary money management firm specializing in global stock, bond, and currency asset management for retail clients. Previously, he was general manager of Plexus Trading, where he specialized in currency futures and commodities trading. During his successful career, Mr. Crooks served as chief currency and futures strategist of M2 Futures Inc., an investment boutique headquartered in Chicago, as well as vice president of Global Strategic Research for an international investment boutique, where he was responsible for providing daily advice and global strategy analysis.

Prior to entering the investment arena, Mr. Crooks held various corporate finance positions. He has written extensively on the subject of global currencies and international economics and has been published in Asian Times, Futures Magazine, Barron's, Bloomberg, Dow Jones Newswire, and across many financial websites. He has also appeared on Bloomberg TV and CNBC.

Mr. Crooks holds a bachelor's degree in finance from Florida State University and a master's in business administration from the University of North Texas.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.





The Dollar Bottoming