In March of 2008, the U.S. Dollar was sitting at an all time low against the Euro, with the U.S. Dollar index sitting at 70.70. It was all over for the dollar in the eyes of most, as the percentage of traders bullish on the dollar stood at 6%. Just 6% bulls. Sentiment was so bearish on the U.S. Dollar at the time, that these quotes came out from the media (provided by Elliott Wave International):
"The dollar is a terribly flawed currency and its days are numbered." (Wall Street Journal quote)
"It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency." (George Soros at the World Economic Forum)
"Greenback is losing Global Appeal... the 'Almighty' Dollar is Gone." (Associated Press)
Well, sentiment was so bearish, and as EWI points out, "the beliefs about a market lean so far over in one direction, that the boat investors are sitting in is about to tip over...". In other words, sellers of the U.S. Dollar were exhausted, and rather than losing its status as the world's reserve currency as most were predicting, the U.S. Dollar index took off in an explosive 27% move to the upside in just one year, from the bottom in March 2008 to the top in March 2009. By the time the Dollar topped out in March 2009, rather than forecasting the end of the Dollar, the media was closer to forecasting the end of the world with headlines such as "Dow 5,000?" and stories that talked about deflation and depression when the Dow was trading below 6,500 and bottoming, and the U.S. Dollar index was trading at 89.62 and topping. Then, in 2009, the U.S. Dollar index had a big retreat as the global economy was going through reflation, with the buck falling over 17% from its top of 89.62 in March 2009 to its low in November 2009 of 74.17. On November 20, 2009, just six days before the dollar bottomed (and only 5 trading days), I wrote a post on this blog titled "Dollar Doomed? Not so fast." Since that time the Dollar has had yet another explosive rally, this time in the face of entire countries' credit ratings being questioned rather than just individual corporations, as was the case in 2008. The Euro has fallen the most against the Dollar, falling almost 22% against the Dollar from a high of 1.51439 in late November 2009 to a 14-year low of 1.18758 in June 2010. Now, rather than the stories of "inflation worries" heard on the media in March 2008 and November 2009, There are stories all over talking about how the Euro is heading to parity against the U.S. Dollar, as if it won't stop before it gets there. This kind of pessimism has yielded just 2-3% bulls in the Euro, and 98% bulls in the Dollar a COMPLETE change from November 2009, when there were over 95% bulls in the Euro, and just 3% bulls in the Dollar. Below is a chart showing both two extremes in the Euro, in November 2009 and June 2010.
There were inflation and death-of-the-dollar worries at the bottom of the U.S. Dollar, and deflation and depression worries at the top in the U.S. Dollar, when at each turn, just the opposite lay ahead. As Robert Prechter points out, markets always give you a story at a major turn to justify a continuation of the current trend, right before a reversal. In November 2009, everyone was giving you a reason why you should own the Euro and not the Dollar, now in June 2010 everyone is giving you reasons why you shouldn't. In the two major lows in the U.S. Dollar, the story was high inflation or even hyperinflation in the U.S., now its a breakup of the European Union and a demise of the Euro at its 14-year low against the U.S. Dollar. Now, this does NOT mean I am bearish on the U.S. Dollar. By no means am I bearish. However, it has had quite a rally and is due for a rest, just as stocks and commodities were due for a bounce. However, I do not expect this bounce in the stock market to last that long. I am extremely bullish on the U.S. Dollar for both fundamental and technical reasons, both of which I discuss in my November 20, 2009 post. In terms of technicals, here is one possible long term wave count on the U.S. Dollar that I show in Chart 1 below. The reason I have waves (4) and (5) in parentheses is because they are hypothetical. Regardless, I still expect the Dollar to take out its 88.71 high, and go much higher. The Dollar is in at least a cyclical bull market, if not a Secular Bull Market. This is going to depend on what down leg in the the U.S. Dollar is being corrected. If the Dollar is correcting the move down from 2000, then it should only be a 3 wave move. If it is correcting a move down on a larger degree (even possibly dating back to 1913, when the fed was created and the Dollar's purchasing power started diminishing) it should have a MUCH larger move up to well above 120 (2000 high), in a huge short squeeze. (I also discussed the "short-dollar bubble" in my November 2009 post).
The most striking to me of the three quotes from various media sources in 2008, right at the bottom in the dollar, is the one by George Soros, who implied that "the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency" would mean the end of credit expansion was inflationary was based on flawed thinking. Let me explain my reasoning with data. The end of the credit expansion Soros was referring to was most likely an expansion in credit from the 1930's, which, indeed, has expanded at an unprecedented rate. This has led not to monetary dollar inflation as most people believe, but Credit Inflation. Most people believe that the Dollar is being devalued by the fed and as a result we will have hyperinflation and the Dollar will be worthless. The funny part about this kind of doomsday sentiment on the U.S. Dollar is that it is no different from any other market, including the Euro against the Dollar in June 2010. I want to present the following picture: an inflation calculator from 1913. It is from a website called usinflationcalculator.com, and it will calculate how much something that cost a certain amount of money in a certain year costs now in today's dollars. This example shows that a good or service that cost $20 in 1913 now costs $440.42 in 2010, an inflation rate of 2,102%. Whenever goods are more expensive in terms of a currency (in this case the U.S. Dollar) one can tell there has been inflation in that currency (thus the value of the currency relative to other currencies, goods or services goes down). The inflation rate, over a period of 97 years, standing at over 2,100% says something. It says that all these goods and services denominated in terms of dollars have hit an extreme in price. More importantly, sentiment couldn't be more bullish on commodity prices, especially Gold and Silver, which I will also discussed in my last post. Everybody is always talking about inflation and how it is going to run rampant and the U.S. Dollar is going to zero, but there has already been a tremendous devaluation in the Dollar and inflation from 1913. Inflation is up over 2100% and the Dollar has lost more than 90% of its value. To me, this is no different from the sentiment extreme that existed in March 2008, and then again in November 2009, to cause the boat to turn so to speak, with the U.S. Dollar reversing its downtrend sharply in 2008 and again in 2010. The only difference is this is on a much larger scale, and can potentially produce a much larger move up in the U.S.Dollar.
