What's Next For The U.S. Dollar? I Believe It's Going Lower!

The dollar index suggests that the greenback is currently trading at a very critical point where a big move either way will determine the next 10 points. Treasury Secretary Tim Geithner today rejected the theory that the government is trying to devalue the dollar, saying that "it is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive." From my experience, when government officials start making statements to support their currency, the currency normally heads lower because the market loves to punish verbal interventions. On the other hand, the "Obummer" administration actually wants a weaker currency as politicians continue to believe that a weaker dollar will benefit exports. The truth is that this country simply does not manufacture enough to benefit from the dollar devaluation.

From a technical perspective, the USD/CHF cross has always had a close resemblance to the dollar index, and the pair has broken down from the symmetrical triangle, and therefore, I am expecting a similar outcome for the dollar index. If you agree with my analysis, I believe EUR/USD and AUD/USD remain the best bets.

QE II Is Next For Other Usual Suspects!

The Fed has successfully achieved its objectives with the QE II program, which was aimed to support the markets (both equities and bonds) while devaluing the U.S. dollar. However, every country in the world needs a weaker currency in order to protect their exports and sustain the economic recovery, therefore, I believe the developed countries will most likely find reasons to ease more and the emerging markets, facing inflationary pressure, will logically increase taxes on capital inflows to limit currency gains. For example, Brazil last week doubled its foreign capital inflow tax rate to 4% from 2% to curb Real's strength, and I expect other developing countries to take similar measures. What do all these ultimately mean? I believe it will be excessive inflation and real assets such as commodities, and yes, even real estate (especially in distressed markets such as the U.S. and Japan) will fare very well in the next few years. This is the worst time to hoard cash as investors because your savings will be eroded by all the cheap money. This is why I think all assets will continue to do well in the short term, including equities, bonds, commodities, and real estate. On the currencies front, given all the liquidity, I expect commodity currencies' strength to continue as investors chase yields.