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Dollar Rally, part Deux



John's "Dollar Rally" piece lays bare the nature of the dollar rally: technical. As I hope my comments about the behavioral aspect of negotiated financial markets over the past few months have made clear, no market is "one-way", just like nothing in nature expands or contracts linearly. Dynamic forces of growth and contraction are the rule not the exception in financial markets (and we have postulated that that dynamic process is governed by Phi (0.618).

All of the things that make the dollar a terrible long term investment that John, myself, and others have laid out in the past year remain as sound as ever. The dollar's latest rally eliminates none of those concerns.

But the dollar index (DXY on your Bloomy) was down (almost exclusively) from the summer of 2001 to 2004, dropping 30% in value in that time. And during Q4:03 and Q1:04, there wasn't a Wall Street strategist or a major financial magazine (The Economist being but one) that didn't trumpet the fall of the dollar as an established trend. And once everyone grasped the trend, the probability that the trend would pause and/reverse was high. That's what is happening now.

It is guesswork at this early stage to suggest when and where the dollar rally will fail and the fundamentals that make the dollar such a bad long term investment will re-assert themselves (your instincts would be correct to think that it will be a phi-based price and time relationship to the 2001-2004 30% decline). But understand that those fundamentals need to change drastically in order to make the dollar neutral or attractive again. And we're very far away from that change today.

As always, this is not advice, just one take on the current dollar rally.
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