It’s cold and raining outside. It’s damp and dark, and I’m in a foul and dark mood. But it’s not because I’m getting used to the Alaskan weather in my new home.

It’s because I keep watching the dollar fall farther. Today, the dollar actually hit the lowest it’s been since August of 2008.

I don’t know about you, but I have been watching in morbid horror, the slow train wreck that is the U.S. dollar. As a currency expert, I can see the collision course the dollar is on. I know the falling dollar is just going to accelerate and get worse over the next few years.
Frankly, it’s depressing to watch.

But there is a ray of sunshine in this whole sordid affair. That’s the dollar may be a train wreck waiting to happen in the long-term. But the short-term could be an entirely different story altogether.

So let’s put on our trader hats for just a second, shall we? Rather than telling all you long-term investors how to hunker down and prepare for the long-term dollar decline (as is usually our stance here in FX University)…I want to talk to you traders out there for a moment.

Because believe it or not, in the short-term, we may be looking at the biggest dollar surprise since the dollar did a complete about-face in July 2008.

If you happen to be a trader, this could be your opportunity to grab some massive short-term profits later this quarter and into Q1 in the Forex market as the dollar makes a temporary U-turn.

If you are a long-term investor, any coming dollar strength (however short-lived) would be the time to load-up on cheaper foreign currencies while you still can.

Who Would Be Crazy Enough to Push the Dollar Higher

Believe it or not the same U.S. corporate America and Wall Street may now rescue the U.S. dollar in the short-term. The destructors may actually be the rescuers now!

Let me explain! I believe the dolts have it all wrong, but I am smart enough now to stand in front of a train rolling downhill.

We are at the beginning of the “Earnings Season” for the third quarter (Q3) for corporate America. Starting today we will see the banks report their Q3 numbers. Alcoa, the commodities giant, has already reported their Q3 and surprised the market with healthy numbers.

To backtrack a bit, the second quarter numbers for most companies were positive. The results beat the analyst estimates.

Now the problem I see here was that the analysts had become very pessimistic in their expectations coming out of last year and the dark days of September 2008 – March 2009.

Companies were able to produce decent results compared to ‘estimates’ because they slashed spending to the bone, and in many case into the bone. So those very “positive” companies that beat estimates were on the bottom line. In fact, most missed on the top revenue line.

This all caused the U.S. dollar to fall based on the fact that things were improving in America! As in the “flight to safety” was finally over, stocks are king again! Everything is smooth sailing once again!

(If you’re thinking “WHAT?!” You’re not alone…)

Dolts Spark Dollar Reprieve

This is what I call the DOLT mentality.

The traders punished the dollar when the economy seemed to improve here in the U.S. and abroad.

It was as if all the big traders decided, “things are good here, time to invest in more ‘risky’ assets again!” That includes the stock markets overseas as well as higher yield currencies such as the Australian dollars and euro.

At the same time, they punish the U.S. Dollar when things are “good” in America. Hmmmm…

So what happens when the sheen of the “feel good America” wears off? Well, for starters, we’re going to see a correction in stocks and other risk assets. If that happens, what will happen to the dollar?

You got it! Traders will buy up the dollar once again as they dump all those stocks and high-yielding currencies. Hence, short-term dollar rally!

This is just part of the story. I’ll be back tomorrow with an in-depth look at Q3 earnings, a long with the best ways to take advantage of this coming dollar strength.

Signing off from my strange new corner of the world in Alaska…

Yours in FX Profits,
Ashish Advani

P.S. I’ve been predicting a short-term dollar reversal in our monthly newsletter, The Currency Capitalist for quite some time. Members, I just wanted you to know, I’m continuing to watch this reversal carefully and will inform you the moment I see this trend affect your long-term currency portfolio.