Friday, October 10, 2008

How Long Can U.S. Dollar Resurgence Last?

Some people have been caught off guard by the continuing strength of the U.S. dollar, as most that understand the source of its weakness have predicted its continual plunge, especially after the trillions in obligations the U.S. government has committed itself to recently.

A couple of major factors have been responsible for its current strength, although it's only a matter of time before the piper will have to be paid.

One major reason for retaining its strength has been the countries that had lagged behind the U.S. in economic disaster have now come around full circle and are beginning to participate in the global economic tsunami. That has made some other currencies struggle as well.

This week the International Monetary Fund (IMF) said the economies of the UK and Europe will sputter during 2009, along with the U.S.

The other key to a stronger dollar has been investors deleveraging the investments in dollar-denominated commodities, as well as dollars being sold to acquire stocks. Related to this is institutional investors ridding their funds of positions in emerging markets. This has been going on since about the middle of September.

Investors are now in the position of having to buy U.S. dollars so they can unwind those trades.

All of this is simply suspending the day of reckoning for the dollar. The question isn't whether it will happen, the question is when and how deep the shattering of the greenback will go.

Nothing has really changed in the positive for the dollar since its 6-year decline began against its major trading partners. Only lagging behind the economic disaster in America, and now fully partaking in it, has saved the dollar as its trading partners struggle.

Once this changes and demand for goods and services begin to rise again, all bets are off as to how the dollar will respond. The bursting of the commodities bubble is only temporary, as nations will once again start building and need a variety of goods to grow their economies. At that time we'll begin to learn how deep the disease of the troubled U.S. dollar will really be.

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