The dollar decline to continue... why??? Read for the reasons

We should expect to continue to see dollar weakness. There will obviously be short time periods, short periods where the dollar has a bounce but there are three underlying factors that would give you ongoing dollar weakness, one is obviously the economy that is low growth, high debt, underlying, weak economy in the US, indeed this crisis is probably knocked off 50 basis points from their trend growth.

The second reason why you should expect dollar weakness is because of the clear announcement from all of the high reserve countries China,
Middle East, all of the countries at high reserve want to diversify their reserve base away from the dollars. They won’t do it quickly to lead to a crash in the dollar but they will over coming weeks, months and years diversify away from the dollar into other currencies.

The third reason for dollar weakness is a significant change in trade patterns. To give you one example today emerging countries export more to China than to the US. We have seen a massive increase in the importance of emerging in global trade, a reduction in the importance of the US. All of these three factors would lead you to believe that the dollar will probably weaken from here and emerging currency should strengthen. That would suggest that the carry trade is probably going to be in place for sometime to come.

Source: ET 4th Dec 09, http://economictimes.indiatimes.com/Features/Emerging-markets-to-provide-strong-returns-Schroders/articleshow/5300313.cms

Further, consensus thinks the dollar is going to continue depreciating and therefore the dollar carry trade is pushing investors towards buying gold and emerging markets. There used to be a carry trade on Yen when the yen was at 120. Now, it is at 88. Things can change. I think the dollar carry trade could be over by the first quarter. If this is correct, the dollar is going to strengthen. The weaker the dollar, the higher the US deficit. So, a weaker dollar and higher oil and commodity prices do not make sense to me.

Once this carry trade reverses, funds will be quick to withdraw money from emerging markets. We might see even more volatility for markets in the first quarter if this happens.