Three Possible U.S. Dollar Scenarios

Jack Crooks takes a closer look at three different scenarios for the dollar. In this issue of Money and Markets, Mr. Crooks explains why each of the three scenarios is possible and which ones are most likely to occur.

Jupiter, Fla., (PRWEB) January 27, 2008 -- In this issue of Money and Markets, Jack Crooks takes a closer look at three different scenarios for the dollar. Mr. Crooks explains why each of the three scenarios is possible and which ones are most likely to occur.

Forecasting market tops and bottoms is a mug's game. In reality, the best investors can do is trade with confidence when the time is right.

In fact, the key to long-term market success isn't just about winning trades, it's about limiting what is lost during the times investors are wrong. And the single best way to control risk is by holding two opposing views of the market in mind at the same time.

Take the U.S. dollar, for example. There's a debate raging about its future direction and there are three possibilities.

The first scenario is that the dollar appreciates on risk. The dollar could rise when global risk dominates the financial system. In other words, investors would be willing to ignore economic weakness in the U.S. in the event of a global financial shakedown.

Capital would rush back into greenbacks despite underlying structural problems that would ordinarily hurt the dollar.

U.S. fund managers held approximately U.S. $20.7 trillion under management as of the first quarter of 2007. All these professional investors have likely been underweighing the U.S. dollar and dollar based assets. That means most of their holdings are in places like Europe, Asia and Latin America.

And much of these investments are highly leveraged into the derivatives market. Data compiled by the International Swaps and Derivatives Association shows that the outstanding volume of over-the-counter credit derivatives increased from U.S. $3.5 trillion in 1990 to more than U.S. $415 trillion by the start of 2007.

Up until August of last year, these leveraged bets by institutional fund managers worked well because there had been little volatility in financial markets. But the exceptional volatility in the markets since the beginning of 2008 is changing that dynamic quite a bit.

The second scenario is that the dollar will fall to new lows if the U.S. economy muddles along and expectations for U.S. interest rates turn sour. Just recently, the Federal Reserve slashed benchmark rates by 75 basis points in an emergency announcement. This remedial action followed a series of consecutive rate cuts and precedes a scheduled meeting at the end of the month, where the Fed is expected to act again.

Basically, this scenario represents falling growth and falling interest rates. It's tough for the dollar to stay afloat when it's on the short end of its two most important fundamental drivers. This scenario also assumes that the rest of the world no longer needs the U.S. economy for growth.

The third scenario is that the dollar will rise. The buck could possibly rise on the back of a U.S. growth surprise. Of course, this would be a huge surprise, and is thus the least likely of the three scenarios.

Despite the hit U.S. consumers have taken from the housing recession and surging energy prices, they've shown surprising resiliency. There are some indications of weakness, but for the most part a decent labor market has been enough to keep consumers spending.

This scenario, however, would require a much less accommodative Federal Reserve. And they've already committed themselves to a financial and economic bailout. Plus, confidence would need to return quickly for U.S. growth to even have a chance.

"A couple of months ago, this sequence of events would have been plausible. But attitudes have changed dramatically. So, a growth surprise just isn't in the cards right now," Mr. Crooks states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1396

About Jack Crooks & Money and Markets:

John (Jack) Crooks is the founder and president of Black Swan Capital, an independent advisory firm specializing in foreign exchange and currency markets investing for retail and institutional clients. A seasoned financial advisory with nearly 20 years of investment experience, Mr. Crooks uses both quantitative and qualitative approaches to determine the fundamental driving force(s) behind the movement of the currency, capital, and commodities markets. He is the editor of Weiss Research's latest investment offerings, World Currency Alert and World Currency Options, which were launched in August 2007.

Mr. Crooks also founded Ross International Asset Management, a discretionary money management firm specializing in global stock, bond, and currency asset management for retail clients. Previously, he was general manager of Plexus Trading, where he specialized in currency futures and commodities trading. During his successful career, Mr. Crooks served as chief currency and futures strategist of M2 Futures Inc., an investment boutique headquartered in Chicago, as well as vice president of Global Strategic Research for an international investment boutique, where he was responsible for providing daily advice and global strategy analysis.

Prior to entering the investment arena, Mr. Crooks held various corporate finance positions. He has written extensively on the subject of global currencies and international economics and has been published in Asian Times, Futures Magazine, Barron's, Bloomberg, Dow Jones Newswire, and across many financial websites. He has also appeared on Bloomberg TV and CNBC.

Mr. Crooks holds a bachelor's degree in finance from Florida State University and a master's in business administration from the University of North Texas.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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