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Since May, when it was near an all-time low, the U.S. dollar has rallied. Compared to other major currencies of the world, the greenback is up five percent since July, as the chart below illustrates.
The question: should investors get into this U.S. dollar rally?
Chart courtesy of www.StockCharts.com
Dear reader, the U.S. dollar is not moving higher because the fundamentals of the U.S. economy are getting better. It’s moving higher because other parts of the global economy are doing worse than the U.S.
The eurozone economy is so weak that the European Central Bank has lowered interest rates again, pushing the value of the euro lower. In the United Kingdom, Scotland is looking for independence. The crisis between Russia and Ukraine continues without resolution. New troubles are brewing in the Middle East. China reported yesterday it would start pumping money into its largest banks.
Right now, with the majority of major world central banks either printing more of their paper money or bringing interest rates even lower, the U.S. is the best of the worst.
But I believe the rally in the U.S. dollar will be short-lived.
Central banks are trying to move away from the U.S. dollar as their reserve currency. At one point, trade in the global economy was dominated by the U.S. dollar. This is changing, slowly but surely.
Consider just one of many recent examples; the Chinese and Argentinian central banks will be doing an $11.0-billion currency swap operation. This will allow Argentina to increase its reserves and pay for Chinese imports in yuan—the deal was signed in July. (Source: Reuters, September 7, 2014.)
Putting this into simple words: the dollar has been thrown out the window when it comes to trade between China and Argentina.
And ask yourself this question: if you were the one running China or Russia, wouldn’t you want to get out of U.S. dollars so trade is denominated in your currency? I don’t think the Chinese or Putin would want anything more.
Let’s face it. The U.S. stock market has become a bubble again—probably the world’s biggest bubble right now. When that bubble starts to deflate, it won’t be pretty for the U.S. dollar.
To protect wealth, I would do what many central banks are doing these days. They are buying gold.
Originally posted at Profit Confidential
© Michael Lombardi, MBA
