The Dollar: The Fundamental Debate Rages

The following excerpts were taken from the December 19,2004 issue of The New York Times, written by Jonathan Fuerbringer. They are still just as relevent today.:

If there were a contest for the person most likely to influence the path of the dollar in 2005, it would be easy for many investors and travelers to overlook a compelling nominee. Two of the most obvious choices are President Bush and Alan Greenspan, the chairman of the Federal Reserve. Mr. Bush’s sway over the dollar is considerable. He could, for example, direct the Treasury to fight a dollar decline by intervening in the foreign exchange market.

Comment: All very true, but as a trader how does the debate influence your decision to buy, sell or how much you buy or sell?

Mr. Greenspan and his Fed colleagues are expected to raise interest rates further next year, a step that could help the dollar by making it more attractive to invest in bonds in the United States.

Comment: Of course this could very well be true, but it could very well be false. Trying to divine market direction based on predictions of what the Fed may or may not do — is tough work. Trend followers on the other hand wait for the actual market direction (manifested in price movement) to tell them when to enter or exit. If the market is trending up, making new highs, perhaps hitting 100-day breakouts, entry rules can be triggered. Let the price start to “go” before you place your bets.

But in the end, the most important figure may well be Hu Jintao, the Chinese president and Communist Party chief. The focus should be on Mr. Hu because China has pegged its currency, the yuan, to the dollar. When this peg is either relaxed or tossed out, the dollar is likely to plunge sharply against it.

Comment: Policy wonks may enjoy this kind of “watching”. Political circles and economists may enjoy this debate, but for trend following traders, it is nearly useless. Yes, we all want to catch the new dollar “plunge” (and be short), but until any trend begins, the predictions of an unknown future should not provide comfort.

Some economists argue that if the Chinese do not allow the yuan to trade more freely, the dollar will not fall enough to reduce the nation’s record current-account deficit.

Comment: The hard part in spreading the trend following gospel is that we are competing against so many well-intentioned, bright writers. The vast majority of finance writers are aiming all of their commentary squarely at traders. It is all designed to get them to take a “direction” on the market and unfortunately for the bank accounts of many, they listen.

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