“The dollar traded near a three-month high against the euro on signs the global economic recovery is gaining traction,” we read on Bloomberg this morning.  Excuse us?  Let’s make sure we understand  this correctly; the world economy is improving, and so the dollar rose?

See, that’s odd because for the past nine months, the headlines have read some variation of “Dollar falls as risk appetites return and global economy recovers.”

So…an improving economy causes the dollar to fall until it causes it to rise.  That makes sense.

Nassim Nicholas Taleb, author of Fooled by Randomness, would have a field day with this.   (We’ve always considered Fooled to be quite a bit better than his more recent The Black Swan.)  Taleb dedicated quite a bit of the book to poking fun at the financial press, specifically their tendency to confuse correlation with causation.  In this case, the dollar is going up and the world economy is improving, therefore the dollar is going up because the world economy is improving.  This is not to say that financial journalists are stupid; far from it.  But the economics of the industry pressure them to “put the pieces together.”  Humans shy away from complexity.  They like absolute answers, not ambiguities.  And frankly, no one would buy a newspaper that read “the dollar rose (or fell) today, but it is most likely statistical noise with no significant meaning.”

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Hedge fund manager David Einhorn had some interesting comments on the dollar in the recent Value Investing Congress:

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse.  So, I conclude that picking one these currencies is like choosing my favorite dental procedure.

This more or less sums up our view at HS Dent.  We agree that the dollar is a horribly mismanaged currency by an irresponsible and self-destructive government.  The problem is…so is every other major world currency!  It’s difficult to make money shorting the dollar when there is no viable option to short against.

Einhorn reaches the conclusion that, since all paper currencies appear to be in a race to the bottom, gold is the direction to go.  We’d tend to disagree with Mr. Einhorn on this count because we believe gold will face some serious headwinds in a deflationary environment — and the bond market is still telling us, in contradiction to the gold market, that deflation is the real concern.

The dollar is a despised asset right now — it is nearly impossible to find anyone who is bullish on the dollar.  This could make the dollar an intriguing contrarian investment.

Should  the stock market roll over in a new bout of risk aversion, the dollar should rally sharply.  But even if risk aversion remains benign, we would expect the dollar’s current weakness to reverse at least marginally in the next year.  Its current depressed value against the euro would appear to be unjustifiable given the economic challenges that the eurozone faces.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We are asked quite regularly what we see in store for the dollar.   This is a difficult question because nearly every commentator on the matter has an answer that is, for lack of better words, ideologically motivated.  For whatever reason, people want to love or hate the dollar.  For some, the dollar is a source of national pride…for others an example of everything wrong with what the government has become.  

Our view of the dollar can be explained by tweaking Winston Churchill’s defense of democracy: “Democracy is the worst form of government except for all those others that have been tried.”  

To adapt Mr. Churchill’s words, the dollar appears to be the worst currency in the world…except for all those others. 

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