Reflection Series: Strong USD in 2010, but not for a good reason

Nouriel Roubini, and top fixed income manager, Jeff Gundlach, possess a contrarian view on the future of the U.S. dollar. While most analysts, economists, traders, investors, and speculators call for ongoing weakness in the greenback, Roubini and Gundlach believe the dollar will rebound and risk-based assets will retreat.

Jeff Gundlach of TCW is Calling for Deflation and Dollar Rally.

One of the few areas he’s bullish on is the U.S. dollar — but not for good reasons.

Gundlach sees such large debt defaults in coming years that he thinks the trend will cut the supply of dollars, pushing up the currency’s value.

“We’re standing on the edge of a major default wave,” he said. “Defaults are the elimination of dollars. You could eliminate so much actual wealth that this could be the source of a strong dollar rally.”

While Gundlach is clearly in the minority with this assessment, one individual who shares this outlook is Nouriel Roubini. What does Roubini see? Much of what Gundlach sees. Bloomberg provides interesting perspective in writing, Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble,

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis. “We have the mother of all carry trades.”

“Everybody’s playing the same game and this game is becoming dangerous.”The dollar has dropped 13 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s.

Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit”.

“The risk is that we are planting the seeds of the next financial crisis,” “This asset bubble is totally inconsistent with a weaker recovery of
of economic and financial fundamentals.”

(seekingalpha.com, October 28, 2009)