As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a bull market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.



What determines the value of a dollar? The common belief is that purchasing power determines the value of money, which is partially correct, but that is not the entire story. In a world of floating currencies, money is also valued in terms of other money. Simply opening a bank account in Europe, and gaining a few % per annum interest, would have returned a US based investor over a 50% return in 5 years. There are a few ways to look at that, but they all point to the same conclusion: the value of the dollar is declining. The other logical observation is that by NOT investing in the Euro, an investor is actually LOSING 50%. This is a difficult mental leap for many to make as they don't see losses in their bank account, but as we see $4/gallon gas, $3/gallon milk and skyrocketing commodity prices, many are noticing. They only have to realize the simple fact: prices are not increasing the value of US Dollars is declining.

Who is not affected by a declining dollar? The poor, debtors, manual laborers, and tradesmen (because you can continue to perform your trade for dollars, pesos, or bananas if need be regardless of the continuing slide of the dollar  tomorrow you may charge twice as much but so what?) But if you have any wealth; a house or a stock portfolio, denominated in dollars, the declining US Dollar should be the most important issue to you because that portfolio is losing value as the dollar does. In the worst case scenario, the Fed can default making US Dollars worthless overnight.

Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.

Let's examine why the dollar is declining and what can potentially stop the decline.

The largest player in the US Dollar is clearly the Fed, the sole issuer of the US Dollar. Investment Banks and Hedge Funds, at the end of the day, rely on the Fed for regulation, clearing, liquidity, and currency controls; they are distributors and traders of US Dollars not the manufacturer. It clearly states on the Fed's website that the Fed conducts foreign currency operations in the open market, and maintains US holdings of foreign currency and swaps. This would indicate the Fed has the ability to intervene in currency markets in order to protect the strength of the dollar, and although the Fed may have that ability, it states in the same article that:

US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign ex-change value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase must the opposite of what happens when U.S. interest rates rise.

The Fed therefore officially controls exchange rates of the US Dollar through Monetary Policy. The Fed, in response to a weakening US economy and a Subprime crisis, has taken an aggressive policy of cutting interest rates, thus dropping the dollar.

So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.

Technically, once a downward spiral starts in currency, it is very difficult to stop. In stocks, an issuer can buy back shares in order to dry up liquidity and stabilize the price; a common practice among penny stocks listed on pink sheets. However if the US Dollar declines, the Fed would need Euros in order to buy back US Dollars, and since the Fed is not an issuer of Euros, it would take a near act of God to convince the ECB to loan the trillions necessary to support the dollar in the event of a default or run on the banks. While the Fed does have some mechanisms in place to stabilize the markets, the act of supporting your own currency is like pulling yourself out of a sinkhole by your own hair. Once the selling starts, it could feed on itself and create a downward spiral  as the value goes down more large holders, worried about further losses, may panic and sell, thus adding fuel to the fire.

It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse  on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.

All the facts and economic data point to massive dollar sell-off look at a USD/CHF chart and you can plainly see it has already started.

FX as an asset class

There are many ways to invest in FX as an asset, but this should be done only with the help of a qualified professional or someone with experience in FX. Everbank offers foreign currency CD's and foreign currency deposit accounts: https://www.everbank.com/ This will not excite most investors but at least you can have non-dollar denominated deposits insured by the FDIC.

For a more versatile approach, CTA's offer FOREX Managed Accounts, usually with minimums starting at $10,000. These accounts are pure FX trading strategies, some are extremely conservative and others are extremely aggressive. Various strategies can be implemented on these accounts which vary from simple news and economic analysis by traders with 20 years experience, to fully automated quant systems.

Funds such as the MERK hard currency fund offer FX specific returns as a mutual fund. From their website: http://www.merkfund.com/

The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.

Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.

FX Overlay

If a business or portfolio has exposure to multiple currencies, a hedging program can be implemented that combines multiple strategies to deal with currency risk. Large corporations such as Intel may have their own treasury desks, but smaller companies or financial firms may not have the resources or knowledge in place to justify such programs, however there are many companies who offer this service, or it could be built using proven models from the ground up.

FX as an industry

Explosive growth opportunities exist in the FX industry as US based investors take notice. The real opportunity in FX is in marketing, because of the widespread lack of knowledge about FX. Sadly, you don't need to know much to make a fortune in this field, and it's the marketers that will ultimately make the most, as they introduce an uneducated and unenlightened public into the most significant market of our age. What will out of work real-estate developers do as the market continues to weaken?

Beware FX Scams!

Because FX is completely deregulated, FX attracts many criminals. The allure of a secretive market only traded by large banks makes a good pitch to unsuspecting suckers. However there are a few easy ways to determine scams from the real thing, such as the NFA, CFTC, SEC, or by dealing with only companies and individuals who associate themselves with large FX firms who are registered with the NFA. The fact that FX attracts criminals doesn't diminish the opportunities in FX any more than the movie oiler Room proves that all stock brokers are cocaine snorting crooks.

This article is by no means exhaustive nor is it intended to be. Regarding bias on the topic, considering we are in this business, the fact that these opportunities exist, and the fact that dollar is declining, is why we ARE in this business and not in stocks or bonds. A day may come where FX is the only significant market left in the world, as domestic exchanges are ravaged by reckless monetary policies and rogue political administrations. In the meantime, protect yourself against calamity and position yourself to capitalize on the opportunity of a lifetime.

If you aren't familiar with Elite E Services, we recommended buying Gold at 279 and investing in New Zealand Dollars in 2002 when the NZD/USD was .39. George Soros made his fortune trading currencies, not selling stocks. In the mid-1990's, Intel made more money in FX than selling processors.

February 26th, 2008 - This day will be remembered by many as the last day of the Dollar's reserve status. May we remember the US Dollar well, in the good times.

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Theoretically, the US Dollar can go to zero. While unlikely, it should be remembered that nearly every currency that has ever existed throughout history, eventually has a crash that destroys 90% of absolute value, or more.

Won't foreign Central Banks support the dollar?



Why should they? If you are hungry, and your 600 lb. neighbor (who is now so fat he can't even walk anymore he needs to use one of those little carts) missed a few meals, which happen to be 5x expensive as yours, would you finance his dessert? Of course not. You are thinking many things, but supporting his habit of overeating isn't one of them. The US consumes over 25% of the world's resources but produces less than 10%. Economists may not care for such a crude analogy, but the situation with the US Dollar is very, very simple, and should not be overcomplicated. The USD has been a reserve currency for the post WW2 world, but since Nixon abandon gold standard, the USD is backed by only the belief and faith in US Government. We are seeing a commodity boom, not because of a bubble in commodity asset prices, but because of a decline in the USD, the world's reserve currency in which many commodities (especially Oil and Gold) are priced. In any event, it's not likely that foreign central banks will bail out the dollar, because that would in effect make them eat a realized loss in their current account. Moderately wealthy nations cannot afford to take the loss of the US, the largest and wealthiest economy in the world. The US has been a financial big brother who have bailed out other failing economies  but the US has no big brother to lean on, except maybe Russia, although that wouldn't go over too well in Washington. So if the US Defaults, who can come to the rescue?

Gold is cheap

Adjusted for inflation, Gold should be above 1500  without considering any boom. Many are wondering if commodities can continue to increase, without considering how depressed commodity prices were in the late 90's. An economy can live without services, or money, but people cannot decide not to eat or use Oil. Gold is money, the high price in Gold is reflective of investors concern about the value of money  any money. The US Dollar is a reserve currency so when USD goes down, so do many other currencies. The majority of USD holders are foreigners, but that is changing (in the past 10 years foreign USD holders have decreased from 77% to 62%).

What to do?

An argument of this nature should end in a that's next or that you should do. Unfortunately, this is a complex situation with no magic bullet solution. On a basic personal finances level, one should sell your mortgage at any price and become debt free with low cost of living. Don't bet on any economic upturn that will save your finances, things will only get worse. Second, do what you do well  no matter what the value of the dollar or the state of the economy, there will always be demand for goods and services (unless you happen to be in real-estate business, in which case you could start looking into farms.) The good news is that in any time of chaos, uncertainty, and reorganization, there are always massive opportunities. Taking advantage of them may not require huge amounts of capital. Knowledge of the situation can cause one to be in the right place at the right time or at least not in the wrong place at the wrong time for example it would not be smart to be in south Florida amidst economic suffering which could lead to crime, rioting, overall fraud, and a depressed local economy.

Property surrounding small country towns has been doubling in 1 year! Farmland has increased by as much as 500% in some areas over the last few years. There are plentiful opportunities in this market, but they may not be the traditional opportunities that investors are accustomed to.

It's 2008

There is a new market thinking, accept it or not. We don't live in the 1970's, it's not 1970 it's 2008. In 1970 Russia was communist, now there are more billionaires in Moscow than in New York. In 1970 Oil had not yet peaked, there was no Internet, financial markets were not deregulated to the extent that they are now, there were no derivatives, no climate change, and no Oil hungry China. In 1970 Europe was scarcely organized, only 25 years of reconstruction post ww2, and there was no Euro.

Thinking Different

Therefore, the only way to survive in the New Investment Paradigm is to be nimble and stay ahead of the information curve. In any field, applied intelligence can earn a solid position and even great profits. Safe havens are no longer safe as they were, the bond market is getting destroyed by inflation, TIPS (inflation protected bonds) are trading negative for the first time ever, meaning you are betting inflation will be worse than the small loss you will take on the bonds.

A trader named Paulson made a record Wall Street profit on single trade, shorting SubPrime loans. Gold investors are happily sitting on 300%+ returns since 2002. Those holding US Dollar short positions have doubled their money in several years. CTA programs have achieved 70% - 150% in 2007, trading currencies, commodities, and futures. Anyone long Oil or Gasoline futures in the past months would have been very profitable.

Clearly, there are hundreds of opportunities but no clear magic bullet solution that could be recommended, compared to 5 years ago when a US Dollar short or Long Gold portfolio could have been safely recommended. It is for this reason Elite E Services is launching a Global Opportunities Hedge Fund, which should be ready by late spring. If you are trading for yourself, take quick profits and don't hold any positions for the long term, and seek new opportunities. Keep in mind the opportunities may be biased toward the Short side than the long side, as DOW and NASDAQ components will be hit by a sinking dollar, sinking US Economy, and credit problems.

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Most FOREX traders rely on analysis to make plan their trading strategy. This article will discuss fundamental analysis. The other common form of analysis is technical analysis. After reading this article you should have a better understanding of fundamental analysis and how to use it as part of your FOREX strategy.

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.



Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Just like most markets the FOREX market is controlled by supply and demand. Many economic factors can affect the supply and demand but the two most critical ones are interest rates and the strength of the economy. The over all strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.

There are many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all traders.

There are many indicators that are released but some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

Interest Rates - can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade - If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.

In the US alone there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the internet and is provided by many brokers.

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Fundamentals are associated with the economic health of a company, measured in terms of revenues, earnings, assets, liabilities, Return on Equity (ROE), Return on Assets (ROA), Return on Investments (ROI), growth prospects and cash flows, etc. The fundamentals tell you about a company. You can say a company is having robust fundamentals if it is growing at a nice pace, generating a profit, has limited debts and abundant cash.



The analysis of a company¡¯s fundamentals involves getting deep into its financials, rather than day-to-day movement in its share price. Equity researchers normally do fundamental analysis in order to calculate the intrinsic value of a company¡¯s stock. If a company¡¯s stock is trading above the intrinsic value or fair value, then the stock is overvalued. If a company¡¯s stock is trading below the intrinsic value, then the stock is undervalued. However, if you watch the stock markets very closely, the share price of most companies never matches the fair value. Often, day traders and investors who would prefer short term investment options invest in those stocks, regardless of the companies¡¯ long term growth prospects. However, long term investors generally prefer to invest in companies with robust fundamentals and ignore near-term share price movements.

The following are various components that constitute a company¡¯s fundamentals:

Revenues: Revenues (sales) are the total amount of money received by a company through the sales of its goods and services during a specific period of time. Revenues are one of the most important barometers of the growth of a company as it indicates whether there is demand for their products and services.

Cash flows: Cash flows are calculated by deducting a company¡¯s cash payments from cash receipts over a particular period of time. Cash flows indicate the liquidity position of a company. However, one must pay particular attention to the operating cash flows, since the health of the business can be most clearly seen there.

Net income: Net income, which is also called the ¡®bottom line¡¯, is calculated by subtracting from revenue, all of the company¡¯s costs, such as operating costs, interest expenses, depreciation, taxes and other expenses associated with running the business.

Balance Sheet: Balance sheet is the company¡¯s financial statement, which reflects its assets and liabilities. A company¡¯s fundamentals are said to be robust if its assets are significantly higher than the liabilities. However, one must carefully analyze companies who are reporting large intangible assets as they may have questionable liquidation value to offset any real liabilities.

Return on Assets (ROA): ROA is an Indicator of a company¡¯s profitability, which is calculated by dividing the net income for the past 12 months by total average assets of the company. This is one of the important indicators, which long-term investors consider before investing into a particular stock.

Although long-term investors and institutional investors consider a company¡¯s fundamentals before investing, the share price of a company often does not correspond to the fundamentals ¨C which can present enormous investment opportunities. A company¡¯s long-term growth is driven primarily by fundamentals, while a company¡¯s share price can be driven by short-term news and investor sentiment, which can be extremely volatile. Every investor must consider a company¡¯s fundamentals before investing into its stock if you want to gain stable returns over the long term.

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It has become imperative for every forex trader to learn how to predict the price trend and which method or software is the best.

When you do forex trading, it is very important to understand the difference between fundamental analysis and technical analysis. A quick explanation of the difference among the two types of analysis is: fundamental analysis focuses on money policy, government policy and economic indicators such as GDP, exports, imports etc within a business cycle framework while technical analysis focuses on price action and market behavior, especially on chart and technical indicators.



Needless to say both schools are equally disparaging about the other, and both believe their techniques are infinitely superior. But the reality is that it has become increasingly difficult to be a purist of either persuasion. Fundamentalists need to keep an eye on the various signals derived from the price action on charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or the myriad of societal issues that influence prices.

Generally speaking, fundamental analysis can only judge which direction the market will move, and technical analysis can supply both direction and rough currency rate.

Keeping in mind that the financial underpinnings of any country, trading bloc or multinational industry takes into account many factors, including social, political and economic influences, staying on top of an extremely fluid fundamental picture can be challenging. Meanwhile, forecasting models are as numerous and varied as the traders and market buffs that create them. Different people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. At the end, some may make huge profit and some lose their money. You can not say fundamental analysis is easy.

Remember, fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist's forecast of the upcoming GDP or employment report, you begin to get a fairly clear picture of the general health of the economy and the forces at work behind it. However, you'll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.

Tip: If you are new to do forex trading and do not trade frequently, you can mainly use fundamental analysis for your trading.

Don't disturb yourself by information overload. Sometimes traders fall into this trap and are unable to pull the trigger on a trade. Normally, your first feel is the answer for you to do forex trading. At that time, you are sure which currency is strong and which country's economy is good. The more simple, the more useful.

However, trading a particular market without knowing a great deal about the exact nature of its underlying elements is unbelievable. You might get lucky and snare a few on occasion but it's not the best approach over the long haul.

For forex traders, the fundamentals are everything that makes a country tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is very important to understand fundamental analysis and use them on forex trading.

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