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Currency Thoughts:
Dollar Bucks A HUge Trend
Market confidence continues to build that 2010 is going to be a good year for the dollar, says Larry Greenberg of CurrencyThoughts.com. Catch Larry, and TheLFB trade team on ForexTV Live.
The U.S. currency clawed through several big figures this past week such as 1.40 per euro, 90 on the yen, 90 cents per Australian dollar, and $1.60 per pound sterling and 70 cents on the kiwi appear on the brink of getting taken out.
European and Japanese officials are praising the virtues of a stronger dollar for the U.S. and global economies, and no complaint has been heard from the Obama administration about the greenback’s better tone. During 2008, Swiss authorities adopted the most blatant hands-on currency management, halting with intervention when necessary all further franc appreciation against the euro beyond 1.50/EUR. That stance abruptly ended about six weeks ago, symptomatic of a greater willingness by all governments to let markets determine exchange rate values without policy interference.
The downturn in equity prices, evidence of returning risk aversion, has lifted the spirits of dollar holders. We see in this latest market turnaround that the inverse correlation between the dollar and stock prices persists strongly. Given how far stocks climbed after bottoming last March, a downward run now would appear to have a considerable additional distance to run, especially since equities have repeatedly exhibited an inability to benefit more than fleetingly from favorable economic news such as today’s better-than-forecast U.S. GDP and other data. That’s a hallmark of bear market behavior and suggests that the upturn of the dollar also may be only in its infancy.
U.S. news has been mostly dollar-supportive. Chairman Bernanke was finally confirmed for a second four-year term, removing one uncertainty, and the healthcare debate, no matter what happens from here, will not conjure up as much fear about a ballooning fiscal deficit as before.
Economic data, although mixed, on balance point to continuing expansion, and Fed plans to normalize policy continue to grind forward. Quantitative easing is getting shut down, and the inclusion of the word “recovery” in the FOMC’s latest statement suggests that the central bank will begin lifting rates before, not after yearend and indeed closer to July than December.
For people betting on a rising dollar, the euro’s identity crisis couldn’t have come at a better time. Because the directional default in the dollar since the late 1960’s has been downward, any cumulating advance of the dollar needs to draw energy from more than positive U.S. circumstances. The European Monetary Union never ideally fit the blueprint for a suitable currency union, and early misgivings about the lack of a common fiscal or foreign policy have returned with a vengeance.
The safest bet remains that the EU will bail out Greece when push comes to shove, but similar logic led analysts to assume a bailout of Lehman brothers in 2008. Moreover, a speedy resolution of the Greek debt saga does not appear likely, so this euro-corroding factor isn’t going away quickly. After that specific national problem is addressed, other peripheral euro area members like Portugal, Spain and the numerous central European nations requesting permission to join will cause continuing investor anxiety. Full Article...