The dollar has recently fallen to an all time low against the euro and one of the worst scenarios for the world economy for the last few years has involved a dollar crash. Is it time to prepare for that crash now?
We must ask ourselves, what would cause a dollar crash? It would have to involve America's dependence on foreign capital it's most dangerous vulnerability. America's dependence on foreign capital has lead to its large deficits. Do the US deficits threaten its and global financial stability? So long as the US remains the most attractive foreign investment destination in the world it can sustain such large deficits. However, if some event would occur, like say a crisis in the American financial markets that would spook foreign investors and cause them to ditch the dollar fast then the dollar will tumble.
The sub-prime mortgage woes was just such a crisis and to be honest the dollar held up pretty well. In fact these events showed clearly that if private investors become frightened central banks will pick up the slack. In order to abandon the dollar there would need to be an alternative choice for foreign investment and there simply put is not.
The stability of the US politically and socially, in spite of its severe deficit, still leave the US the world's most stable and reliable economy. Although Europe is stable politically, its slow growth make it an inadequate substitute for foreign investors. And even though China's rapid growth is inviting, the threat of political instability determinations any long-term bets on its economy which in itself is still very young and needs time to mature.
My long term outlook is to buy the dollar and sell the euro.
In the long term nobody has anything to gain from the decline of the dollar and excessive exchange in exchange rates is damaging to the growth and economy of all regions of the world. Especially China who currently owns a substantial portion of the US debt. Also the euro's rise is beginning to hurt the competitiveness of Europe's exports and there is the possibility of central bank intervention to protect against the strong euro and weak dollar.
In the near future the dollar decline and further weakness most likely will continue. I am not about to stand in the way of such a strong trend as the dollar is near all time lows against the euro. But as everyone is talking about the weak dollar and my neighbors talking about hedging them against the weak dollar I know one of those rare opportunities is beginning to present itself just like it was obvious to me the bull market in US equities was coming to an end once my mother and her "investment club" began buying and selling stocks online or when a photographer at a wedding told me how he was going to begin flipping houses I also knew we had reached a top in real estate prices.
A worldwide "ditching of the dollar" would bear astronomical consequences. I do not believe anyone is ready to allow that to happen and I do believe there will be interference to prevent it. Like I said though, I will not just jump in with this extremely strong trend in place so I will use my strength and talents as a technician to get into this trade.
In the member area in the Rules & Methods section you will find the methodology on how we will approach this trade. We will be trading the 4 hour, daily, and weekly time frames as this is a long term strategy. Since our positions will be short, the eur / usd will be collecting interest and pips the whole way.
By Jordan Lindsey
JCL Capital Inc.