The Weak Dollar – 10 Reasons Not to Worry

In early June, before an appearance on CNBC‘’s Power Lunch, I prepared a “top 10 list” to talk about the handwringing over the dollar index (ICE: USDX) dropping below 80 again. I wanted to debate Larry Kudlow about his “king dollar” thesis in which he claims the right to have his cake and eat it too. In other words, he wants a higher stock market and a higher dollar.

Since its June lows of 78, the dollar index has fallen about 3% further. No panic, no freefall. Just a slow grind lower as players from central banks to mutual funds, multinational corporations to hedge funds and carry trade currency programs, all position themselves for investments that are not dollar-based.

We don’t know exactly how this movie ends, but my thesis is that “it’s all relative.” Despite its lack of originality, this is an especially important idea about currency relationships and cross-border economics. The world’s relationship with the biggest, strongest economy on the planet is one of necessity and symbiosis.

The dollar will always be a “king” of sorts. It’s just that right now we are trading lots of them in return for stability and growth. Time will tell how low the dollar index goes (new lows below 70 next year?) before it bottoms and heads back towards 100 again for its next 7-10 year cycle. So far, I still stand by all the points below as we embark on that journey.

1. Little positive correlation between strong equities and strong dollar.
2. “King dollar” was not the story during the credit crisis that took EUR back to $1.25.
3. Dollar sell-off began in March with the  equity bottom and commodity “reflation.”
4. China diversifying reserves is an old story whose time has come.  Will get priced in slowly.  No panic here.
5. Bailouts, Deficits, Inflation-Oh My! Generational, systemic crisis needs quantitative easing, more than economy needs fiscal restraint.
6. Global economy needs U.S. economic vitality more than U.S. needs a strong dollar.
7. Can’t have BRIC/EM growth without risk appetite in other major currencies.
8. Truth is that EU is in no better shape right now-the euro is not going to $1.75, but if it did, we’ll adapt quite well.
9. Oil – the other gold – and commodities in general are the best inflation hedges.
10. The U.S. is not a perfect economy, it’s just the best and only game in town.  It’s all relative in a global economy of fiat currencies and wealth driven by productivity innovation.