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Commentary Topic from greenfaucet

Is the Dollar Really Rising?

The U.S. dollar is not rising; it is the Euro that is falling. There is a big difference and you and your investments need to understand the difference. The Euro has decreased from about $1.50 to $1.37 in just a matter of a few of weeks. The main reason for the dramatic selloff in the Euro is the debt issues in Portugal, Ireland, Italy, Greece and Spain (PIIGS).

But no matter why the move has occurred, the important point is that the US dollar is not rising because of any intrinsic change in its value. There has been no change in interest rates and there has been no move to reduce the supply of dollars being created.  Therefore, any increase in value should only be evidenced by comparing the greenback against another currency that is being viewed as having intrinsic problems of its own. It should not, in the long term gain any significant value if measured against hard assets.

To further illustrate this point let's assume my weight is 170 lbs and say, Chip Hanlon tips the scale at 250 lbs. The difference between the two of us would be 80 lbs. Now if Chip puts on 100 lbs--he is by some accounts actually showing signs of increased girth--and I stay the same, the difference would then be 180 lbs.  Likewise, if I lose 100 lbs and Chip's weight is static, the difference remains 180 lbs. But it makes a huge difference to me and my health if I weigh 70 lbs or 170 lbs. The same is true if Chip weighs 250lbs or 350 lbs.

The point is that it's not just the movement in the exchange rate that is important, it is which currency is moving and why. Now to be sure we have witnessed a significant move lower in commodity prices, which should not have occurred if the US dollar was not changing its intrinsic value. But the $150 selloff in gold prices was a reactive move in the reversal of the dollar carry trade and not evidence of a secular change in the direction of the value of the dollar. If investors take a longer term view of the dollar, its bear market fundamentals remain firmly in place against hard assets. However, alternatively flawed fiat currencies may not be the best investment to witness the dollar's decline.