US Dollar Thoughts

The consensus seems to be that investors should be short the US Dollar. Earlier in the year we agreed but without strong conviction, particularly in the face of such pervasive consensus. We now think it prudent to take a bit different view. In brief, we think the recent slowdown in the US economy, particularly the rollover in housing will result in higher savings rates and lower consumer spending. In turn, this will result in a narrower trade gap. Perhaps more importantly, foreign manufacturers will see lower sales and profits.

Why is this important? With the consensus forecasting a lower dollar, these foreign producers have often used borrowed dollars to pay for high priced oil and industrial materials. When sales come in less than anticipated there will be a scramble to find dollars to repay the loans. This will result in an economic crisis somewhere, but more importantly, a rise in the dollar. For more information see the article by GaveKal Research at http://drewbbc.wordpress.com/files/2006/06/gavkal-6-26.pdf

Strategy Update: The US Dollar recently double bottomed. In the Dynamic Fx Strategy, we added some value in mid-July with the last mini run up in the dollar (see chart below). We closed that position and left the portfolio mostly in intermediate bonds, which have continued to have a nice run.

We're now once again rebuilding a long US Dollar position with a portion of the portfolio. (the index is represented by AGG - the Lehman Aggregate Bond Index)