Since July, the US dollar has converted into one of the world’s strongest currencies. Eric Roseman says the greenback could continue to rally if stock markets decline again. But this upswing should not be confused with fundamental strength in the US economy. The buck has been a “liquidity haven” as credit dries up, but the government’s spending blitz will eventually take its toll on this fiat currency. Is the U.S. dollar’s rally topping out? Not just yet. From its all-time low of 1.605 versus the euro, the U.S. dollar has gained a cumulative 18%. The buck now ranks among the world’s strongest currencies since July, trailing behind the Japanese yen. In that time, the dollar has soared versus all majors units, causing all sorts of losses for hedge funds, companies and individual investors. It’s been a disaster. I suspect the dollar’s rally is not over. I’m still expecting the market to eventually test its October 2002 lows and that event will likely be dollar bullish. But a short-term correction seems likely at this point and is consistent with the big global stock market rally and the compression of credit spreads we’ve seen over the last 10 days. But let’s not confuse dollar strength with a bull market for the greenback. The dollar enjoyed a short-term accounting anomaly in the face of a global credit squeeze. That’s it. It has absolutely nothing to do with improving economic fundamentals. This is a dollar liquidity story and not the start of a secular bull market like we last saw in 1995. And the dollar is already coming under pressure again. For the first time in 100 days, the dollar is showing signs of fatigue following the Fed’s interest rate cut on Wednesday. Other economies are also slowing rapidly as fall sets in. A host of central banks are now cutting rates too; including the Chinese, Norwegians, Australians, Canadians, and the ECB - you name it. The name of the game now is global reflation. The market was incorrect in awarding a dollar premium since July. The consensus is that the United States is doing everything it can to fix its economy while other countries - namely in Europe - remain far behind the U.S. recovery curve. This, in part, is true. Economic problems in Europe are worse in many ways; with severe turbulence now brewing in its backyard as the IMF, EU and World Bank come to the rescue of Hungary and others. But the dollar is not a safe haven in this crisis. It’s a “liquidity” haven. If the dollar was truly King of the Hill it should be strengthening, not weakening, against the yen. Again, if we’re expecting markets to test the October 2002 lows, then the dollar’s short-term decline is only temporary; the bulk of the credit bear market is over at this point but the real economy now faces serious challenges to consumption. The Fed cut rates to 1% yesterday. Before it’s all over I expect the Federal Funds rate to be 0%. We’re heading exactly down the same road as the Japanese almost 20 years ago. The only difference is that this hard recession won’t last 10 years like it did in Japan because U.S. authorities aren’t vacillating like the Japanese did. But the resultant cost of this extraordinary spending blitz will be enormous and exacting on U.S. finances and ultimately, the dollar.

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