The dollars unusual strength – will it last?

Why is the dollar strengthening with the huge bailouts that Bernanke and Paulson, both stunned rabbits in this credit tsunami, have fought so hard for? The answer lies in the flight to safety of US treasuries as emerging economies, until recently thought to be safe from the credit crunch, feel the effects the growing storm.

A stampede into dollars has lifted the world’s reserve currency to a two-year high versus the euro and a five-year high on the pound. The dollar is up some 18 percent since July on a trade-weighted basis against a basket of currencies.

But….and this is a big but…there is some unwelcomed side effect to the strength of the USD. The first is that the earnings season we are in is expected to bring about a whole raft of companies reporting that the currency is hurting exports which will be reflected in 4^th quarter results. This is likely to trigger a chain reaction of analyst’s downgrades and send stock markets down even further as investors are trapped in yet another wave of forced liquidation.

Not only that, but the USD should be a virtual basket case right now as the US teeters on the brink of actual bankruptcy…a direction first highlighted by the Comptroller of Currencies at the IMF in 2003 when he openly said that the US should be bankrupted by its huge twin deficits within 10 years…deficits that have deteriorated markedly since then.

So when all the safe haven money flows out of the USD like an unstoppable tide once people understand that the USD, as is, is unsustainable in the long term, the collapse could be nothing short of earth shattering. Make no mistake, the dollar strength is short lived and will reverse, probably violently…but many currencies will topple before then as the flow of capital knocks over currencies like dominoes, before landing back on Asian shores. Once that happens, it will signal the biggest economic boom ever seen in the region…and we will all bow before our new masters.

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Tags: Bernanke and Paulson, Comptroller, Currencies, Dollars, IMF, Liquidation, Stock Markets, USD