Is it Time to Buy the Dollar?

With the financial crisis in the U.S., the dollar has been discounted to probably the lowest point in history. Expectations are extremely low and a significant amount of bad news is currently priced into the dollar. Therefore, is now the time to buy the dollar?

The U.S. dollar index has declined from a high of 1.2190 in 2001 to around 0.7500 for most of this year. Foreign purchases of U.S. securities have been down significantly in the past few months. This indicates that foreign monies are losing their appetite for U.S. dollars. With the U.S. economy still reeling from the real estate bubble that has led to the current credit crisis requiring a $700 billion bailout, can things get any worse for the U.S. dollar?

While the U.S. has averted a recession (two consecutive quarters of negative GDP growth), the slowdown is real and global in general. The key to a dollar rebound may come as the rest of the world drops to the dollar level due to slower growth and higher inflation throughout the global economy.

Europe is seeing slowing growth in some countries and they continued to hawk inflation that is around 4% today (above the expected 2%). The United Kingdom is seeing similar events play out like the U.S.: high unemployment rates, real estate market correction and credit problems within the financial industry. The UK is a few months behind the U.S. in their decline so it is likely they will still be bottoming when the U.S. dollar rebounds.

It is unlikely to see the Federal Reserve to do much as the November elections will be first priority. The key will be to watch the U.S. dollar fundamentals against the British pound and Eurodollar. The fundamentals will determine the real bottom of the dollar.

There are three things to look for regarding a dollar reversal:

1. The market volatility will likely continue to be higher than expected at various times. This will create small trading opportunities.
2. Traders will continue to watch for signals that the dollar recovery will begin such as double bottom pattern in the U.S. dollar index.
3. Monitor the Federal Reserve later this year or early next year for a potential interest rate increase. This will prove to be a big dollar rally

It may take a strong stomach, but there will be opportunities to go bullish on the dollar as the trend is likely to reverse soon.