A Dollar Development Few See Coming

While the US dollar remains fundamentally weak, John Carter predicts that a period of strength will catch many off guard and reviews important price drivers and levels to watch.

John Carter joins me, and John, where’s the dollar going, specifically the dollar index?

The fundamental story on the dollar is completely negative; very, very bearish, and I do think long term the dollar is heading much lower.

However, that being said, I am a trader and all markets, no matter how much fundamental pressure is on them, ebb and flow. I actually think the dollar index is going to rally into November, December 2011, and I think this is going to catch a lot of people off guard.

This is more of a technical bounce. This is more of a seasonal kind of ebb and flow. The fundamental picture has not changed. So, don’t get me wrong, I’m not long-term bullish on the dollar, but again, this short-term bounce—and by short term, a couple of months, five or six months of strength of the dollar—is going to throw a lot of people off guard.

However, this is going to present a lot of nice buying opportunities in markets like gold and silver that are overdone and due for a bounce.

So overall, I would look for dollar strength into the end of the year and use these opportunities in terms of shorting the euro and different things like that.

The one question that I have and I’m trying to get my arms wrapped around is dollar strength obviously correlates to a lot of weakness in a lot of commodity markets, but is it going to correlate into weakness for the stock market because sometimes the dollar and the stock market are inversely correlated and then sometimes they’re married together.

I do think it’s going to put downward pressure on the stock market. So, one of the best indicators you’re going to watch right now, watch that dollar index or you can watch the euro. It’s obviously the inverse of that. So goes the dollar, so goes the rest of the markets this year, and I’m looking for dollar strength.

NEXT: Why We Haven't Seen the End of Quantitative Easing

I know you look at the technicals, but do you care at all about the stuff that comes out of Washington, Ben Bernanke, interest rates, the end of the second tranche of quantitative easing. Do you care for any of that?

Okay, so I do watch it and I do like to look at it. In the short term, it means nothing, but here’s the reality: The end of quantitative easing is a myth. What’s going to happen with that is yes, they’re going to throw it out there and they’re going to try it, but in 2012, we’re going to come across some of these same issues because the base issues have not gone away.

We’re continuing to raise the debt ceiling. The real estate market continues to be soft. Foreclosures continue to hit the markets. The problem isn’t going to go away, and when Bernanke says “Wow, this economy is not recovering like I thought it was,” he is going to open up the spigots again.

I don’t care how determined he says he’s not going to do it, he will do whatever he can to fight off deflation and that means there’s going to be more quantitative easing. So they say it’s ending now; it’s not ending.

How about some of the other currencies? Do you look at the dollar versus the Swiss franc, or I know you have to look at it versus the euro (and) the Japanese yen.

So the dollar versus the Japanese yen to me is one of the more confusing crosses in terms of sometimes it moves with the dollar, sometimes it moves against it, and for that reason, I actually don’t trade the yen very much.

However, I love the Swiss franc long, and the Swiss franc is going up regardless of what the dollar is doing. Dollar up, Swiss franc is holding its own. Dollar down, Swiss franc is up, and that’s because right now everybody is realizing that the Swiss economy is one of the soundest economies in the world.

They’ve been able to (during these hard economic times) keep a budget surplus, and that’s strong for their economy and that’s good exposure to the dollar.

In fact, being in the US dollar—and yes, we’re getting a technical bounce right now—but I’d much rather have exposure to the Swiss franc and the Australian dollar as opposed to the euro, which is representing the debt-laden economy. So I love the Swiss franc and the Australian dollar long for the longer term.