The end may be near for the dollar
Sep 28, 2009
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The dollar's grip on the cliff's edge by its fingernails has become ever more tenuous. Looking at the chart below you can see that the cliff edge level is 77.5. In August it represented important support, since then the dollar has fallen below, rallied to it then fallen again. Any further weakness could lead to a deathly fall.
China, Russia and others keep sniping about the dollar's role as the world's reserve currency. Their rhetoric sounds like a genuine and determined campaign. Their aim is to oust the dollar from its role as the reserve currency. If China has its way, it will be replaced by a basket of currencies with the dollar's role dramatically reduced.
When China achieves this objective, then the risk to America's living standards would be sufficiently severe to engender a policy response of grave proportions. David Bloom, Currency Chief of HSBC, recently said that the dollar looked awfully like sterling after the First World War!
In the model portfolio we still hold the Barclays Capital GBP-JPY Linked Note; we will make an investment gain – if the pound gathers strength against the yen.
You will see from the chart that the pound/yen has, since the low of January 2009 which was the lowest level for well over 20 years, moved in exactly that manner. However, should the price weaken below ¥146, it will trigger our stop loss and will cause us to sell it. At the time of writing, we are quite close to that level.
No reader would have missed recent negative comments about sterling however; we still hold the view that sterling's period of weakness has ended and that we are now in a period of progressive sterling strength, although it will comprise regular pullbacks.
The Sterling Index has retraced to a significant support level. A common principle of technical analysis is that ceilings become floors as prices rise through them and vice versa.
The Sterling Index having risen through its ceiling has pulled back to its floor, from where we would expect it to strengthen. This recent decline, much lauded as a disaster for sterling might prove to be no more than an orderly retracement. What happens over the next few days will tell us a great deal about the outlook for sterling.
• This article was written by
Full Circle Asset Management
, and was published in the
threesixty Newsletter
on 25 September 2009.
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