RCM Editorial: US$ Strength...An Abberation or Reality?

A debate is raging in the financial community about the recent strength in the US$ and weakness in commodity prices. Our opinion here at RCM is that US$ strength is a function of massive redemption and repatriation(which require Dollars to be bought and sent back to the U.S.) that started in September and accelerated in October and not - as our colleagues would have you believe - because the world thinks the US is the best place to invest.

Evidence of the strength of our position can be inferred from the strength of the Japanese Yen verses the Dollar. While world assets are being sold the Yen carry trade is also unwinding. It is not just a coincidence that the US$ was stronger against all currencies but weaker against the Japanese Yen. The Yen carry trade, a huge favorite of the hedge fund community for the last few years, required that Yen be borrowed and invested around the world. Often, significant leverage was used in this trade. As the trade unwinds Yen must be bought and paid back, which artificially increases the value of the Yen for as long as the unwind lasts. In essence both the Dollar and the Yen are rising from the short term effect of currency repatriation.

I'd like to enter the next quote, courtesy of TrimTabs, as further evidence the world does not believe in US$ strength: “The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance.” On Friday, French President Nicolas Sarkozy said, “The time when we had a single currency, one line to be followed, that era is over and it came to an end on September 18.” On Saturday, Brazilian President Luiz Inacio Lula da Silva declared, “It is time for a pact between governments to build a new financial architecture for the world.” There have been similar statements from Russia, China and the Middle East over the last few months. Make no mistake, US$ strength is fleeting at best. As our government piles on more debt and TARP increases in scope there will be consequences and they don't bode well for the greenback. We have been witness to one of, if not the biggest, redemption phases in history over the last few months. Never before have we seen assets redeemed from stock and bond mutual funds, hedge funds, money market funds and savings accounts all at the same time as we saw in October. This unique time in history calls for a unique understanding of markets. Taking them at face value and building opinions based on past cycles or one's past experience will be detrimental to your financial health.