The US Dollar May Have Reached Unsustainable Territory

Photo of author

By Jacob Maslow

surprised businessmanWhenever any asset reaches a saturation point, it reaches a point of diminishing returns. In fact, it reaches a point where any further long investment can trigger a crash. Of course, the biggest example of this is the huge amount of long bets on the dollar. There are just so many bulls betting on the further appreciation of the dollar. This is going to be a problem because the US dollar’s pricing mechanism would start looking like a clown car.
One oil industry analyst accurately used this description to describe the price of oil. When the price of oil was over $100, there were always a lot of signals that the oil was overpriced. Regardless, it stayed over $100 because it was very hard for players to get out of that price range because there were so many speculators pushing up the price of oil. Once enough speculators got out their position, however, it got really easy to get out of oil, and it triggered a massive exodus which crashed the price of oil.

In normal times, there would be a relatively orderly entry and exit process. This way, the price would be tempered going up or going down. Instead, it would became a clown car scenario where just as a clown car is filled with clowns, it’s very hard to get out. However, once you reach a certain point where it’s easy to get out, the car empties out very quickly. Some analysts point to this situation where the bullish bets on the dollar are so saturated that it may trigger this impacted stampede. It only takes a few negative signs for all these bulls to abandon their position wholesale, which would crash the price of the dollar.

Still, from a comparative basis, the likelihood of this happening is currently quite remote. Why? Foreign exchange is priced based on currency comparisons. That’s why there are foreign pairs. Whether you pair the US dollar against the Japanese yen or the European euro, the picture is the same. Those competing currencies are artificially depressed because the banks that issue those currencies are devaluing those currencies by doing quantitative easing.

Images Courtesy of DepositPhotos