The Dollar Bubble

A lot has been written and said about our weak dollar. Advocates state that a weak dollar is good for our export business and rotten if you happen to be a retiree planning a vacation overseas.

That said, I say, 'Phooey on both.' I'll explore what I mean in a later blog. The big thing with the beaten up dollar, that Treasury Secretary Geitner is attempting to shore up or at least stabilize, is the carry trade. Carry Trade, you say? It sounds like something from a 1920s movie. No, that was carriage trade. Carry trade is when investors, usually banks and sovereign funds, borrow cheap dollars and buy higher yielding assets somewhere else. With interest rates at or close to zero our government is basically giving away money, and it doesn't look like they'll change their philosophy any time soon.

Investors use the difference between what they pay to borrow and what they buy to make billions of dollars in profits, almost a no-brainer. It is a form of arbitrage with virtually no risk.

The last time investors enjoyed such a run was when the Japanese yen was kept at artificially cheap rates and ran for a period of 12 years. The dollar may do the same, according to Richard Franulovich, a senior currency trader in a November 11th Forbes interview. In fact, Franulovich doesn't think that even if the United States hikes rates it will take years to get competitive with other countries. The carry trade may continue all the while.

Unwinding such complicated currency trades would be a global event and if circumstances changed quickly it could have serious implications. That is the real risk for everyone who is unmindful of global investment reality.

The sudden strengthening of the dollar would have carry trade investors scrambling to liquidate holdings. They would have to sell what they own to pay back the dollars they borrowed. The fallout from such a massive liquidation would have the same repercussions investors experienced in the 2008-2009 market sell off. Unwary investors would see their holding plummet in value, and for them it would be for no explicable reason. This added, unseen and unmindful risk is something investors with short-term goals need to be aware of. The problem is most investors, broker and 'so-called' planners are clueless to global economics. And, just in case you still don't get it- this is a new global economy.