Friday, June 12, 2009


1. Introduction

From the beginning of the week until 06:00pm GMT Thursday, virtually every currency was rising against the U.S. dollar. Demand for riskier, higher yielding currencies like the AUD and NZD, along with concerns about growing US debt and future inflation, drove the USD lower despite better than expected news on retail sales and unemployment. Even the lower yielding Euro and British Pound were in strong multi-day up trends against the USD Crude oil continued its surge upwards (over 100% since the beginning of the year) as the weakening dollar (in which oil is priced) and lower than expected inventories continued to feed its uptrend.

Then around 06:00pm GMT the dollar got stronger. Why?

2. Mr. Geithner Goes To Beijing: The Dollar Love-Fest, Part I

Think back to the beginning of June, when Treasury Secretary Geithner made his first trip to China. The Chinese have been one of the principal buyers of US bonds for many years. Thus a very large portion of their cash reserves are in U.S. dollars. Given the rapidly plummeting value of these holdings due to exploding levels of U.S. debt and money supply, they were not pleased, and no doubt wanted to, ahem, politely but firmly express their concern. In order to set the proper mood, in the days prior to the meeting, they publicly suggested replacing the dollar as the world’s reserve currency. No doubt poor Tim got an earful, and perhaps learned a few new Chinese expressions beyond polite greetings and goodbyes (though perhaps common to Chinese translators of Gangsta Rap).

Not surprisingly, then, Geithner proclaimed that the U.S. would support the dollar. Fed Chairman Ben Bernanke chimed in a few days with similar words, though he did backtrack ever so slightly by mentioning something about the banks still possibly needing some help. Reuter’s mentioned that Chinese and other unnamed “Asian monetary officials” (happy to play their part in covering their own assets) would continue to buy Treasury bonds even if the U.S. lost its AAA rating.

Given at least these token signs of support, the USD strengthened for a few days, as the below hourly chart of the EUR/USD shows in the early days of June.

3. Mr. Geithner Goes to Italy: The Dollar-Love Fest, Part II

Now, here we are mid June. With the dollars’ “Obama-nable” fundamentals of rapidly expanding debt and supply still in place with no sign of abating, and the talk of early June a distant memory, the USD has spend this past week mostly losing value against other currencies.

For example, look at this hourly chart of the EUR/USD. From June 8th, the EUR had been in a steady up trend against the USD, which broke around 6 p.m. GMT. As of this writing is has fallen and broken through 4 layers of support:

1. 1.4089: Its 200 hour simple moving average

2. 1.4033: A major hourly resistance level at which no less than THREE KINDS OF RESISTANCE CONVERGE:

a. its 50 hour simple moving average,

b. it's lower rising channel line,

c. AND its lower Bollinger Band (set at 20, 2 for the technical analysts among you).



Why the change?

Just maybe, traders thought back to the beginning of June and his meeting with the Chinese.

Then they noted:

1. The coming G8 meeting Saturday

2. U.S. Treasury Secretary Geithner's pre-summit meetings on Friday with Finance ministers from Japan and Russia

3. Like China, both Japan and Russia hold large portions of their foreign currency reserves in U.S. dollars. Like China, they too are not pleased.

4. Like China, Russia recently set the tone for its meeting by openly considering reducing its dollar holdings.

What do you think they’ll be discussing?

Given the recent pattern of events surrounding Geithner’s meeting with the Chinese, what do you think he’ll be saying when he comes out of these meetings?

4. How to Profit? Learn from the Forex Traders

It seems that foreign exchange traders (aka forex traders) anticipate another round of statements by the U.S. and its creditors that the dollar will be supported and Treasury bonds will continue to be bought.

So how do you profit?

Since we appear to be seeing another round of short term spin management, traders and investors should use this opportunity of a rising dollar to sell dollar assets and buy assets that ideally benefit from the dollar’s weakness.

As mentioned in many earlier articles, my favorite assets are those that

· Benefit from commodity price increases

· Earn in another currency

· And ideally, also pay you an income based on that foreign currency while you hold the asset.

If you haven’t read them yet, here are a few to look for ideas.

Best Investments for Rising Oil? High Dividend Energy Stocks

Commodities for Income Investors

Two Must-Have Canadian Income Trusts for High Dividend Diversification

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 3

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

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