Contrarian Alert: Everyone Hates the Dollar

Following the money in banking, economics and Washington

Dollar doomsaying is at record levels. Is it time to stray from this unhappy flock?

The dollar slipped Monday, as the prices of oil and gold rose yet again. Even the other sickly paper currencies perked up, with the euro hitting $1.40 – just pennies below its annual high -- despite looming questions about the fate of the weaker economies on Europe's peripheries.

Anything that can't continue will stop

Moody's downgraded Greece for the umpteenth time, noting the government's difficulties in collecting taxes, and bond yields hit new highs in Portugal.

Higher borrowing costs won't help the Portuguese avoid becoming the third European Union state, after Greece and Ireland, to take a bailout. A stronger euro, for that matter, won't help ease the intense stress on the recession-wracked states in southern Europe and Ireland.

Yet for now the currency everyone is betting against is the dollar. The short position on the dollar hit an all-time high last week at $40 billion, according to foreign exchange analysts at Nomura. That's $5 billion more than the previous record, seen last November after the Federal Reserve said it would buy U.S. Treasury bonds by the bushel to prop up the economy.

Can 40 billion speculators be wrong? Though it's rare nowadays to hear anyone utter a good word about the dollar, bets against it are "creating an asymmetric risk of a USD bounce," says Jens Nordvig at Nomura.

Traders have spent the past year selling the U.S. dollar and picking up its counterparts in Australia and Canada, thanks to those economies' propensity to benefit from a commodity price boom. The Swiss franc, which is up 16% against the greenback over the past year (see right, below), has long been seen as the safest paper currency due to a strong domestic economy and an aversion to expansive monetary policy.

But lately the dollar has been weak even against the euro, which if anything appears the more fragile of the two because of questions about who will pay to keep the weaker economies afloat.

A majestic view

The latest euro bounce is being driven by two factors: the European Central Bank's apparent determination to raise interest rates, which tends to attract flows into the euro and out of the dollar as investors seek out higher yields, and the surge in oil prices, which stands to punish the U.S. economy more than the ones in Europe.

The United States, after all, is the world's biggest oil importer, and a higher oil price acts both to tax already stretched consumer budgets and to widen the yawning U.S. trade deficit.

Accordingly, economists at Standard Chartered cut their dollar forecasts Monday. They now expect the euro to fetch an average $1.38 in the first quarter and $1.42 in the second, compared with previous forecasts of $1.28 and $1.20.

Of course, foreign exchange rate forecasts amount to little more than a shot in the dark, and the problems facing the U.S. economy are nothing to sneeze at. Addiction to foreign oil, addiction to free Fed money, addiction to insane, unconstructive "debate" about serious problems.

Yet it's easy to see that lots of people now are betting that the trends we've seen early in 2011 -- higher oil, weaker dollar -- will continue indefinitely.

With all that money sloshing into the same places, there is the risk that one event -- say, a sign that upheaval in the Middle East may have run its course -- will snap markets back in the other direction.

And so, the Standard Chartered analysts still expect the tide to turn against the euro Рjust later rather than sooner.

"In terms of real interest rates, the USD has one of the more attractive profiles over longer time horizons, as US inflation has so far stayed low and the yield curve continues to hold at very steep levels," says Standard Chartered economist Callum Henderson. "Importantly, these growth advantages do not appear to us to be priced in for the USD as investors remain focused on shorter-term rate differential arguments."

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