Net capital outflow from US is bearish for dollar – looking at Iraq war and limitless borrowing and spending, international investors start losing confidence
Peter Oberois
Feb. 16, 2007

The dollar can in for a real rough ride. If this happens, it will be a very interesting opportunity to accumulate US Dollar. The Iraq war and American limitless borrowing and spending are affecting the international investors confidence. The private investors are now questioning how America will return all that capital inflow.

America needs approximately $3.5 billion of capital inflow for dollar to remain where it is compared to other currencies. U.S. government reports pointed to the first net capital outflow in a year and a half. That is very significant.

Longer term US Dollar is very bullish. In a deflation stricken world economy, the purchasing power of currency and not the trade deficit or adverse balance of payments drive the relative value of a currency. As market players finally realize that they are in the middle of worldwide deflation and deep recession, US Dollar will recover and rally like never before.

But before that, something very dangerous can happen. As international investors lose confidence on America’s ability pay back, there can be run on the dollar and US based assets. The report today showing net capital outflow is very significant.

It may be the right time to stand aside in the market without holding dollar long. US residents and citizens holding dollar-based assets can hedge with going long Euro or Swiss Frank futures. There are analytic signal that the dollar has entered a bear market and can fall sharply.

Longer term US dollar is very bullish. The fall in the dollar can be used to accumulate the currency. Dollar index now stands at 84. It can test the 80 or 78 level. But that will be an excellent time to accumulate dollar.

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