Is the Dollar Doomed?
By Ed Ponsi, President, FXEducator.com
Q) Hi Ed, I read your Forex articles and find them very informative and interesting. I have one question or concern which I hope you could address concerning U.S. Treasuries and the flight to safety we have seen lately. As most of the G8 countries are now in official recessions, investors have been flocking to U.S. Treasuries as a "safe haven", thus driving up the U.S. dollar. I don't see the reason. My belief is that U.S. Treasuries are not safe. With trillions outstanding, I don't see how the U.S. government plans on repaying these securities. We all realize from the times we live in, that the intrinsic value of paper money is zero!
Ed Ponsi) Thank you for your email. You're right; the current rally in the U.S. Dollar is an artificial rally in my opinion. The greenback is not strong because it is a good currency, but because it is considered a safe port in what is turning out to be a really bad storm. Currencies and governments around the world are on the verge of collapse. Just imagine if your wealth was tied up in Russian Rubles, Mexican Pesos, or Iceland Kronas; you would do everything you could to reduce exposure to your damaged currency and put it in a more stable currency, such as the USD. U.S. Treasuries are considered safe, at least for the time being, since they are backed by the full faith and credit of the U.S. government. There may come a day when the USD collapses, due to failure to pay our huge debts and an increase in the money supply, but that is not likely to happen right now. Meanwhile, it is happening right now in other countries around the world.
For example, in a recent newsletter, titled "The Ruble is Rubble", I mentioned that the collapse of that currency was accelerating, as USD/RUB shot past the 31.00 handle; well, a few weeks later, we are testing 36.00, which just happens to be the level that the Russian government claimed they would defend. Well, they asked for it, and traders obliged by pushing right to 36! (See figure 1).
Figure 1: USD/RUB skyrockets as Russia devalues its currency. Source: Saxo Bank
Looking at that chart, I'm just glad that I'm not holding Rubles! Now check out this quote, attributed to a senior Icelandic official: "The Krona is dead. We need a new currency." That comment pretty much says it all, as Iceland's currency and government have both collapsed. Could Mexico be following in Iceland's footsteps? The Peso is getting clobbered by the greenback, recently breaking out of a massive ascending triangle pattern on the daily chart (see figure 2).
Figure 2: USD/MXN breaks out of a bullish ascending triangle pattern. Source: Saxo Bank
All of this mayhem is currently causing the USD to strengthen, but be careful; U.S. bailouts will likely cause the greenback to weaken in the long run, due to excessive borrowing and, most likely, excessive printing of dollars. The buck can't cheat reality forever, and at some point, when the current fears subside, the bill will come due. Gold is already looking pretty stout compared to most commodities, recently trading above $900 per ounce; could this be in anticipation of future USD weakness? That's a possibility we can't ignore.
Q) Hi Ed, I wonder if you can help. I am trading a rather small account for two weeks now – but I have no confidence and stress is my enemy. I am trying everything – even scalping, and maybe this is what got me scared. How can I conquer this – what could help? Maybe there is a way to decrease the stress, where psychological burden is not so big. Cheers, Adam
Ed Ponsi) Thank you for your question. Stress is a huge problem for traders, but there are effective ways to deal with it. When I started trading I was constantly stressed out, because I didn't have a plan – I'd just enter trades when it seemed like a good idea, and then monitor the trade constantly for signs as to whether I should stay in or get out. This seemed like reasonable behavior at the time, but now when I look back I can see that I was "winging it". Somewhere along the way, it sunk in that I had to have a definite plan for every trade. Now, before I enter any trade, I have to give exact answers to these questions:
Where is my entry point?
Where will I place the stop?
At what point will I move the stop? Where will the stop be located then?
Where is my exit (unless the exit is to be achieved through a trailing stop)? Should I use more than one exit? Where exactly will they be located?
Stress is created when we don't know what we're going to do next. If you are "flying by the seat of your pants" you will be constantly monitoring every tick, searching for a sign to determine your next move. But if you've already decided every possible move that you can make – in other words, if you've already completed the decision making process before entering the trade – the stress melts away. We can't force the market to move the way we would like, so don't worry about that; instead, we concern ourselves with the things we can control, such as creating and executing a good trading plan. This is one of the most important habits you can develop to be a successful trader, and you'll feel better too. Good luck!
