Unregistered

Basic logic would tell us that when the FED injects $ into the economy, the supply of dollars goes up and the dollar sells off and inflation follows. I have to pause to think about this and would like others' opinoins.
I for one believe we are in a deflationary bust and inflation is not going to follow. The fed has LOTS of room to move if inflation creeps in. Also, the dollars are not being released to the economy but instead are being abosorbed by the thristy balance sheets of lenders. To me, it's a recapitalization, not a flood of money. But still, there are more dollars. Do we sell off here? Or is it already priced in?
-Adam

David Waring

Hey Adam,

Good to hear from you and its a great question that you pose.

What is interesting to me is that before the financial crisis got into full swing the US Dollar was obviously in a major downtrend. Now we have a US Balance sheet that, with all the debt that is being issued to pay for the bailout, is in a much worse position than it was when the US Dollar was selling off.

In addition to this we have a major increase in the supply of money by the Fed an an interest rate posture which has switched from the hawkish side of the equation to the dovish side.

Looking at all this in isolation you would think that the US Dollar would be in a much worse position than it was several months ago before all this took place but as we know the exact opposite has happened.

So it seems that the deleveraging process has caused a large increase in the demand for US Dollars as traders close out their positions denominated in other currencies and get back into US Dollars. In addition to this it seems that instead of investors being concerned about the large increases in debt that the US Government is taking on, they are still buying up US Treasuries as a safe haven asset.

With all this in mind it is my opinion that so long as traders continue to unwind positions and get back into US Dollars, and so long as the international markets remain in panic mode, then I don't see any reason why the US Dollar will not continue to benefit as it has.

My concern is what happens when calm presumably returns to the market and traders begin to focus on the fundamentals of the US Dollar once again? Will they not begin to focus on the same things that they were focusing on when the US Dollar was selling off before, which now paint an even worse picture, or are the other economies of the world that much worse off that the focus will be on the relative strength of the US when compared to other countries?

It is my opinion that in a few months when things hopefully calm down a bit, traders will once again start to focus on the US Dollar fundamental picture and I think there is a good chance that the dollar will resume its long term downtrend.

With that being said, I am currently looking for opportunities on the long side of the dollar because the current trend is definitely strong US Dollar and there is no point in trying to fight the market.

That's my two cents. I think this is a great topic for discussion so I hope to hear other's opinions as well.

Best Regards,
Dave

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trendisyourfriend

David, your opinion is shared on this side of the fence (Canada) as many economists tend to lean toward these factual evidences you have mentioned.

I wish we could ask this question to Mr. Fibonacci. When will this huge retracement take place ? as going to the states is too expensive right now from a Cannadian perspective

Simit Patel

I don't know if the Fed really has more room for inflation. What has been going on since at least the NASDAQ bubble is that the money supply continues to be expanded, and money is just funneled into a new asset class to create a new bubble. Loose monetary policy helped create the NASDAQ bubble; once this began to deflate, deflation was fought via further expansion of the money supply, which created the housing bubble; as this began to deflate, we saw a short-term bubble in commodities; now that that has begun to deflate, the Fed has tried to re-inflate, though is having some trouble as no one is lending. Still, though, we are seeing what could be a bubble in US Treasuries. Jim Rogers has talked about the Treasury bond bubble.

So is this the last bubble (assuming Treasuries are in a bubble market)? Well if so, we may see a massive contraction of the US money supply when the bubble deflates -- though we'd also see a massive decline in demand for US dollars. In such a scenario, I think we would see significant stagflation, which would be characterized by weak US stock and bond markets, weak US dollar, and rising commodities, precious metals, and CPI.

At least that is how I am seeing it.

trendisyourfriend

As a trader what i fear the most is a second "Bretton Woods" version II.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. This created the unique situation whereby the United States dollar became the "reserve currency" for the nation-states which had signed the agreement.

That would mean the end of volatility, a choppy market with no distinctive direction.