Dollar Bears, Beware: It Could Be Almighty Again Soon

(MoneyWatch)  I received a long, rambling email the other day talking down the dollar's prospects on behalf of a fund management firm I had never heard of. The key line was this: "Fundamentally, there is no compelling reason to hold dollars over the long term."

Sounds like a buy signal to me.

Think about it: Unless the people at this firm have special insight into the workings of the economy and markets (there was nothing in the email to suggest that this was so), then what was obvious to them must be apparent to the rest of the investment community.

Sure enough, a preponderance of investment banks and independent forecasting services are calling for dollar weakness. But if the case against the dollar is so clear cut, chances are these pros and their clients have already done their selling - the currency is already trading near its lowest level in more than a year - so who's left to send it any lower?

The latest reason for dissing the dollar might have been a report this week in a London newspaper, The Independent, that Arab states were in talks with European and Asian powers to replace the dollar with a basket of currencies to determine the price of oil. The Independent is renowned as the voice of Britain's smug, intellectual, anti-American Left, and the head of the Saudi central bank denied the report in the most blunt, unequivocal terms, but the dollar fell nonetheless on Tuesday.

The report conforms to the suddenly fashionable line of thinking that the dollar will cease being the world's main reserve currency - what foreign treasuries, especially in dodgier locales, hold in their vaults. That view has weighed on the dollar and was given some oomph by the recent accord to make the Group of 20, which includes China, Brazil, Saudi Arabia and other well-off emerging economies, the main global economic and financial decision-maker rather than the Group of 7, which is dominated by the West.

Good for them. Those countries have healthy surpluses and well managed economies, so they should have more of a say in how the world is run. But such organizations seldom have as much influence as idealistic internationalists hope. When the going gets tough, we'll see how relieved people will feel holding renminbis and reales in their wallets.

The reserve excuse recalls the argument nearly a decade ago that gold should be shunned because central banks around the world were selling their stockpiles and would continue to do so. That was near the end of a two-decade bear market and just before the metal embarked on a quadrupling in price.

The reason that contrarian investing works is that a uniformity of opinion tends to send an investment's price to an extreme, leaving it prone to surprises that change the trend. It's not the things that you've factored into your thinking that drive markets, it's the unexpected developments that you haven't factored in because you shrugged them off or they came from out of the blue.

There are some of each that could send the dollar higher, and I'll go over them on Thursday.

Read more:

• More Good News Sends Stocks to a Three-Week Low
• Latest Run to $1,000 Offers a Chance to Sell Gold and Mining Stocks
• Bullish Extremes Herald at Least a Steep Correction for Stocks