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Nothing Safe About the US Dollar!
By Mike Conlon | September 9, 2009
A lot is made about the safe-haven status of the US dollar and the inverse correlation it has with stocks and commodities. When the economy is seemingly doing well, risk-takers look to sell dollars and buy higher-yielding, riskier currencies to earn interest. This is more commonly known as a “carry trade” and I described it in an article last week.
The carry trade is a very easy way to make money and it was formerly only available to sophisticated investors. Now, you can participate from the privacy of your own home! The basic premise behind the carry trade is that you want to borrow a low-yielding currency and invest in a higher-yielding currency. You make the difference in interest. Sounds better than putting your cash in a bank savings account, doesn’t it?
*Do you know what one of the lowest yielding currencies is right now? That’s right, it’s the US dollar!
And this is likely to continue for some time. If the dollar is going to continue to decline, it doesn’t sound very safe at all, does it? Here are a few reasons why the dollar decline will continue and why you should be concerned.
1. The United Nations at their most recent meeting asserts the role of the US dollar should be reduced as the world’s reserve currency. While this is “nothing new”, this time it may be different. If the dollar continues to fall then alternate solutions may be sought.
2. The Chinese are now “alarmed” at U.S. money printing. This may cause them to take alternate forms of action and could lead to them not only not purchasing future US debt, but actually selling out of the dollar. This could trigger a massive sell-off in the dollar as the Chinese are one of the largest holders of US dollars.
3. The US Fed and Bernanke are going to keep interest rates artificially low for as long as it takes for the economy to recover. While analysts can make projections about when this might be, it could be a very long time before we recover. This will lead to inflation, which could put a damper on the recovery if the Fed is forced to raise interest rates. This would send the housing market into further decline so at this point they are extremely reluctant to do so.
So how do you protect yourself from this game of chicken the Fed and the government have put us on?
Learn about the currency markets! Diversify away from the dollar! Because the only way that the dollar is going to “do well” in the near future is if everything else does extremely poorly.
Now that doesn’t sound very safe at all, does it?
To learn more about the currency markets and how you can protect yourself from dollar deterioration and rising inflation, check out our affordable currency course here.
And at the very least be sure to also get yourself set-up for a free, real-time practice account. You owe it to yourself to at least see how easy it is to get started!
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