The U.S. Dollar is without a doubt the most hated currency on the planet. The problem is, everyone knows it. Investor sentiment is at an all time low and open interest for the dollar (symbol: UUP, US Dollar ETF) stands at an incredible 97% on the short side. The Obama Administration doesn’t even have a dollar policy in place while the Federal Reserve’s printing presses are set on overdrive. Their latest initiative, to purchase worthless mortgage backed securities off the banks balance sheets in an effort to keep a lid on mortgage interest rates is as deluded as their other failed attempts to re-inflate the economy.
Even China (the world’s largest holder of U.S. debt) and many other commodity based economies around the globe have sounded a call to replace the dollar as the world’s reserve currency. They know the “Fed” has no intention of repaying the exorbitant deficits they’re incurring. Their only chance of shrinking this mountain of debt is to inflate it away by debasing value the dollar. To be certain, if the dollar lost it’s reserve currency status the Fed would no longer be able to freely print money to fund it’s misguided policies or it would run the risk of creating a hyper-inflationary economy similar to what has happened in Zimbabwe (they are presently printing Billion dollar notes with which to buy a loaf of bread).
With so much of the mainstream media’s focus on the reasons for the dollars decline, and an overwhelming majority of investors convinced that the continued demise of the dollar is imminent, the trade has become extremely one-sided.
From a contrarian view it would seem that the market is setting up to punish the complacent investors who have become lulled into a false sense of security with the “short dollar trade.” If one were to listen to the pundits on CNBC it would seem that the obvious and “comfortable” trade would be the short dollar trade. After all, with the endless stream of negative news surrounding the dollar, only a fool would bet on it’s rising. There is no conceivable reason that it should.
Listen carefully. The world is positioned for a violent and continued decline in the value of the dollar… market participants rarely get what they expect.
The U.S. Dollar has fallen 13% since it’s March high. This is a huge move for a major currency and negative sentiment is at unprecedented levels and the fear trade has been exorcised. You’ve seen what a “short covering” panic has done to shares of government owned entities such as AIG (AIG), Citigroup (C), Fannie Mae (FNM) and Freddie Mac (FRE). Try and imagine then what would happen to the world’s most hated currency if even a small rally is ignited and this massive wall of “shorts” are forced to cover their positions.
Undoubtedly the shares of these stocks, like the US dollar, will eventually be worthless. But not before the market bankrupts as many markets participants who have become overly confident with their “sure thing” trade. In recent weeks the selling surge had lost it’s momentum as traders tried to push the dollar down to new lows but the dollar climbed back to it’s highest point in three weeks.
The world hates the dollar but it’s rising. This is an extremely bullish indicator for a sharp rally when the “shorts” run for the exits. Contrarian plays are difficult calls to make because you are going against the consensus view, standing alone against the crowd and the contrarian is generally thought to be crazy as a loon. My experience with contrarian plays are that they don’t always work out, but when they do it’s like buying a winning lottery ticket. The dollar is set to rise… act accordingly.
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