By Jack Crooks (Money and Markets | Original Link)
Now that the European Central Bank has “saved” the euro and our Federal Reserve has declared easy money as far as the eye can see, isn’t the dollar going to get killed?
Well, on the surface that makes sense. But I think those concerns are short-term impacts. I still believe the dollar has entered a multi-year bull market, which began back in March 2008, when the U.S. dollar index bottomed.
And here are nine themes I see playing out that would ensure a bull market for the dollar:
Euro no longer a viable challenger against the dollar
The euro is not saved yet, by any means. I expect another crisis to rear its ugly head within the next six months or sooner. But even assuming the euro is “saved,” I would expect at least a decade of deflation and slow growth. As a result, the euro will fall of its own weight relative to the dollar and other major world currencies.
Most of the monetary policy impact is behind us
Each of the Fed’s new programs has been increasingly less effective in helping the real economy. Sooner or later the market will clear itself. And when it does the Fed will quickly take back all those excess reserves, which means U.S. dollar supply will fall. Therefore, fewer dollars will be out there as demand grows with recovery.
China’s reserves are falling, and hot money is fleeing!
I expect this trend to continue as China’s economic growth slips further. This again goes to the point of a declining global supply of dollars, which will be good for the dollar’s price.
U.S. real assets look cheap
In a world increasingly looking for good long-term investment ideas, U.S. real assets, including real estate and natural resources, look very competitive. This should lead to strong foreign direct investment into the United States. Indeed, good for the dollar.
The ramp up in U.S. domestic energy production helps the buck
There are two ways this is bullish for the dollar: 1) Falling oil imports should help cut our trade deficit; and 2) It leads to more international investment into the U.S. by investors wanting to position accordingly.
Global rebalancing taking place in China and Germany
As the global backdrop for export dependent countries changes, the top exporters — China and Germany — will have to increase domestic demand in order to grow. This will likely help U.S. exports and be the real beginning of the long awaited global rebalancing. It will be dollar positive for sure!
Rising pool of U.S. domestic savings
The credit crisis has triggered a palpable shift in U.S. consumer savings/consumption patterns. I expect this to be secular in nature. As the U.S. pool of savings for domestic corporations increases, the dependence on international funding should fall. If the U.S. current account deficit improves dramatically, the dollar will benefit.
Falling commodity prices
As China decelerates, commodity prices should fall dramatically. This doesn’t mean all commodities nor does it mean the secular rally is over. But over the next 1-2 years, this will put pressure on emerging markets and will likely mean U.S. investors keep more of their money onshore for local (U.S.) investment opportunities. That means more dollars staying home instead of being exchanged into other currencies.
$2 TRILLION in U.S. corporate cash on the sidelines
Once this mountain of cash is redeployed to fund technologies where U.S. companies have a commanding lead, such as in nanotechnology and 3-D printing, it could virtually trigger a U.S. renaissance and would be a magnet for foreign direct investments. That would be very dollar bullish.
Needless to say the ideas I’ve listed above have implications for asset markets that go way beyond the U.S. dollar. Over the next several weeks I will pick up on each of these themes in greater detail to show you why I believe it’s way too soon to write off the dollar or make a long-term bet on the decline in America.
P.S. If you agree that the crisis in Europe is far from over, you should give my World Currency Trader service a close look. Find out how you can sign up for a trial offer today!
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