Rumors of the dollar's death may be greatly exaggerated

So Al Jazeera English TV's latest item 'Death of the Dollar' should be viewed in this light, and if you want a good summary of the dollar's plight then click on the link given at the end of this article.

In short the argument is that the US authorities have debased their currency over time with inflation that has appeared in equities, real estate and most recently commodity prices. This has produced a currency system which is so unstable that the only way forward for the US dollar is downwards with a major financial crisis to boot.

One problem is that this has already happened. The US dollar has undergone a major devaluation so far this century against a basket of global currencies. Are we not in danger of just noticing something that has already occurred? Is this not the reason why it is such a no-brainer to believe the end of the dollar is nigh?

Investor myopia?

Investors have a long history of missing turning points and not recognizing a trend until it is about to end. Is the US dollar not the latest example of this myopia? The trend is only your friend until it stops and then it is not.

Now apart from having all the bad news in the marketplace - and thanks to the newcomer Al Jazeera English TV for joining the in-tray - what we need to support a contrarian view of the dollar's demise is a possible cause for the dollar's recovery.

This is something very easily overlooked when stacking up the gloomy news on the dollar, and yet we saw a nice little rally in the US dollar last May. What was the reason? Financial markets had a bout of nerves and there was a modest correction.

Dollar to rally?

Why did the dollar rally in a market sell-off? Well, that is what happens because when you sell off US assets what do you get in return? US dollars: and that means greater demand for the greenback and its value then rises against other currencies.

So don't get carried away by recent US dollar negative comment from journals like The Economist or more predictably from Al Jazeera. A serious Wall Street crash would be just the thing to revive the US dollar, although that would hardly be helpful to the US economy facing a recession which would presumably have been the trigger for the stock market crash in the first place.

Just as an aside for those holding UK sterling remember that whenever $2 per pound has been breached in the past a fairly rapid correction to nearer $1 has generally been around the corner.

What goes up must come down, and when you read about currency trends in the newspaper or hear about them on the TV then the market is surely close to a major turning point. Whether the US dollar resumes its fall later on is another thing entirely.