It seems that the financial news lately has been full of stories like this (via the FT):

Oil producers shun dollar – Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The cover of The Economist last week even taunted a falling dollar:

The Economist

Now, the dollar has fallen quite a bit in the last few weeks, but let’s all try to remember the last time that the Economist had a cover lamenting the weakness in the US Dollar? I’ll give you a hint… it was in December 2004:

The Economist

In case you don’t remember what happened to the dollar after December 2004, here is a quick 3 year chart of the dollar

US Dollar - 3 Year Chart

You’ll notice that the lowest point over the last 3 years coincided with the publication of the Economist cover lamenting the falling US Dollar in December 2004. I think missed the bottom by a whopping two or three weeks.

Now, that’s not to say that the appearance of a magazine cover causes macro-economic trends — why, that would be silly. In reality though, magazines publish stories that are popular, those ideas that will sell the most copies of their magazine. Unfortunately, popular trends tend to be near their ends — once the majority is on a trend, there are few buyers (or sellers) left to push the trend further in the current direction.

What are the reasons that the US Dollar rebounded in 2004 besides being an overly popular trade? For one, corporate inflows. Corporations based in the US repatriate funds from abroad at the beginning of the year to pay income taxes in the US. The US is the home to many global corporations, and the impact should not be underestimated.

Besides the fundamental case for the dollar, there are plenty of complaints… The “pending” collapse of the Social Security System, the mounting obligations of the PBGC, the increasing trade deficit, the constant printing press mascarading as a Federal Reserve… Unfortunately, all the other major currencies have the same ills. Europe and Japan exceed the US in their demographic crises.

Do I count myself as a Dollar Bull? Hardly… I’m more of a Gold Bull than a dollar bull. But that doesn’t mean that I believe the dollar is doomed — at least not compared to other fiat currencies (the Euro, Yen, etc.). I think the bearishness of the Economist and most other media articles overstate the bearish case, and the dollar is not as not as doomed as most believe…

What would make me change my mind? Continued weakness lasting well past February/March of next year, and/or a breakdown below 80 on the USD index (the low in 2004 was at 80.39).

What do you think?