Dollar Up, Short Term?

Marc Faber, one of my favorite contrarians, remains extremely bearish on the long-term prospects for the U.S. dollar, but he warns traders about a short-term rally. Faber, by the way, was right when he recently warned us about staying away from industrial commodities, including oil, in the short term.

Above I mentioned that the US stock market is now – in the near term at
least – in significant over-bought territory. The opposite seems to be
the case for the US dollar, which has now reached an extremely
over-sold position. I recently attended several investors’ conferences
and everywhere and from everyone I only hear US dollar bashing and that
the US dollar will decline further. As a contrarian this makes me
skeptical since usually universal bearishness leads to rallies while
universal optimism leads to disappointments. Moreover, while I
certainly agree that in the long run the dollar is going to be totally
worthless in terms of its purchasing power, and that a cup of coffee
will eventually cost US dollar 100 or even more, I am not so sure that
the dollar is now over-valued against the Euro. Quite on the contrary,
from a recent trip to Europe it is my impression that at the current
exchange rate the dollar is – purely on its purchasing power compared
to the Euro – somewhat undervalued. As a result, I think that the most
likely financial developments in the next few weeks will be a setback
in US equities and a rebound in US dollars. In particular, I should mention that numerous large currency and
commodity funds have huge leveraged dollar bear positions outstanding,
which could rapidly be unwind once the dollar begins to rally.


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