Chinese New Year special – Where is the U.S. dollar going?

Back in August 2009, I thought that Buffett and PIMCO set up a herd play to weaken the U.S. dollar.  And they succeeded, though only for a short while.

With the benefit of hindsight, it seems reasonable to say that the “dollar weakness” tale of Buffett-PIMCO ended around end-Nov. 2009. Since then the dollar has markedly and consistently strengthened against the euro; the dollar had also risen from lows around 87 yen to 93 yen at year-end, but then it gave up some of its gains to the low 90 yen level.

Here’s my Chinese New Year fortune-cookie special:

Watch out for new “insights” and “pronouncements” from these two investors, but in the meantime, the herding game has become more uncertain. There seems to be a bear play on the euro because of the European debt crisis, and this may have its own momentum independent of what Buffett and PIMCO would like to see. Gold has held up because currency turmoil sets it up as a safe haven asset.

But all this volatility does not bode well for the global economy, so it is wise to be skeptical about rosy recovery scenarios. There is much to be said for the Austrian idea that the maladjustments that led to the 2008 financial crisis have not yet been adequately fixed, what with the major industrial countries still coy about a thinly-disguised reversion to Glass-Steagall rules for the banks. The big banks must have a strong “undercover” lobby working to dilute real financial sector reforms in the G-7 countries. But so far Paul Volcker seems to have called out their game, and the U.S. may well lead the pack in getting its financial markets in shape. This bodes well for an underlying firmness in the dollar against other currencies as well as for economic activity in the U.S.

Consequently, any herd plays from Buffett and PIMCO should now take advantage of sentiment in favor of the U.S. dollar.  Of course, the Nassim-Taleb question is, as always, when will it end?


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