February 9, 2008
For the last several years the $ has gotten pounded by the Euro and other currencies. Those of you who bought into Diana Shipping last year know how it soared and now has fallen back to earth although still about double what it was originally purchased for. I've watched all the shippers decline over the last few months but recently I also saw a turnaround. So this is an interesting perspective. I would love to see the $ get stronger but as you will read in other articles I'll be sending you, the odds are still heavily against us. But I keep wondering how European economies can keep going with $8/gallon gas while we're suffering with $3/gallon gas? Europe will yet feel the consequences of our subprime mess as will the rest of the world.
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HOW TO BET LIKE A SHIPPING-RATE TRADER
This week's chart shows the future of the U.S. dollar... The dollar is on the verge of a huge rally against the euro. Here's why:
International shipping rates have a strong inverse correlation to the dollar. When the dollar falls, the world economy expands, and demand for commodities goes up. But when the dollar rises, the world's economy contracts... and shipping rates fall.
Economists use the Baltic Dry Index to measure international shipping rates. As you can see in the chart, the index has collapsed 42% in the last three months as shipping lines lower their rates for transporting goods like coal, iron ore, and containers.
I suspect this time around, shipping rates are leading the dollar. Think of it like a jet ski versus an oil tanker...
The people who control shipping rates are all in the shipping business. It's a professional market, run by the shipping lines. This is the jet ski. There's no interference from speculators, so prices here will react quickly to true economic conditions.
The dollar is the oil tanker. It is subject to thousands of different pressures. For most of this decade, it's been falling. Interest rates are low in the United States, and there has been no incentive for people to save their money in dollars. So it will take time to turn the currency around.
As you can see in the chart, the dollar is still near all-time lows against the euro. Shipping rates are collapsing right now, so the dollar is probably going to rally. It's time to buy the dollar against the euro.
– Tom Dyson
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