Taking Advantage When the Dollar Flips

While investors continue to endure roller-coaster rides in the market, the President-elect, Congress and the Fed appear ready to do whatever it takes to avoid a deep recession. Only time will tell if their efforts are too little too late, but they are willing to throw everything they can imagine at the situation.

That means the Fed will continue to pour massive amounts of money into our financial system on top of the $8 trillion it is already committed in guarantees and direct deposits. The obvious problem of reversing or manipulating an economy out of a recession is that deflationary pressures eventually become inflationary as a system is flooded with new money. This in turn will likely debase currency and reverse present trends sharply lower.

The current strength in the U.S. dollar has many market pundits and analysts stumped because it seems irrational. The Fed is printing trillions of dollars to bail out the economy and corporate America, an action that is normally very inflationary and has a negative correlation on the value of the dollar.

But it's a different scenario this time around -- there are stronger forces at work, with institutions and investors rushing towards safety and liquidity. Major institutions and hedge funds are being forced to liquidate positions to meet investor's redemptions, and these institutions have been dumping commodities and stocks and buying dollars with the proceeds. Also, the unwinding of the carry trade has forced foreign investors to buy dollars to offset the selloff of dollar-denominated assets.

This flight to quality comes along with the short covering from traders who built up positions over the past few years and are now rushing to cover them. As long as forced liquidation is taking place, the dollar will continue to stay strong and when it finally breaks down, it is likely to signal the end of the liquidation process. That means this propping up of the value of the dollar is only temporary, and the uptrend is not sustainable over the long term.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.