Buy the US dollar, today's biggest bargain!

Step back to the late January 1st, 1999 and the launch of the euro. Then many commentators expected the euro to strengthen against the dollar. It did not.

Then came the US stock market crash in 2000 and the dollar strengthened still further as investors cashed out. It was not until the US stock market bottom in 2003 with the invasion of Iraq that the US dollar began its remorseless weakening against the euro with the euro moving from 90 US cents to $1.36.

Spot the new market top! And what will shift the US dollar from its current depreciation to appreciation? Another stock market crash! Do we not see the US economy weakening before our eyes with a massive housing crash in progress? How will profits hold up? What does that mean for stock prices?

US imports falling

What happens in a recession or slowdown is that the volume of imports to the US falls, and west coast ports have just reported a fall in container volumes, so it is happening, not a forecast.

Now lower imports mean that less dollars are spent abroad so the trade deficit declines, and a smaller trade deficit takes the pressure off the US dollar.

But at the same time a domestic recession is the equivalent of a massive tightening of liquidity, and tighter monetary conditions benefit the value of the US dollar, even if they are bad for the domestic economy. Of course, the Fed can cut interest rates to try to counter this effect, but this will be too small to stop the overwhelming impact of a major recession on the dollar.

At the same time, there will be a stock market crash due to the economic slowdown and its impact on profits. This will further suck liquidity out of the US system and again strengthen the US dollar as investment shifts from stocks to cash and bonds.

History lessons

It is an odd thing in financial analysis that an event as recent as the 2000 Nasdaq crash and its impact on the US dollar is forgotten. But such is the fast paced world we live in.

Or just consult the financial charts if you think this is nonsense. The euro-dollar position is very clearly at a turning point. However, just as financial markets presently fail to recognize that the US economy is slowing down and will probably slow down to a recession, which is pretty obvious, they also fail to recognize that the euro bull run is almost over.

It could be next week, next month or in the autumn, but buying the US dollar now is probably the soundest investment choice you could make, particularly if it took you out of equities and real estate which will not perform well during a US recession, almost everywhere.