www.TheLFB-Forex.com The Forex Trader Portal
Market Wire Update:
Strong Dollar Policy
The U.S. Treasury is actively pursuing a strong dollar policy (no laughing at the back), but the greenback continues to decline against virtually every other currency in the foreign exchange market.
It is presumed that a strong U.S. dollar is in everyone’s interest, and lately the ECB is pointing this out at every possible occasion. A strong dollar would reduce commodity prices, including oil, and would reduce the global inflation rate thus supporting consumer spending.
A stronger dollar is not happening, as the currency market continues to price in the twin deficit that the U.S. economy faces, with the trade and fiscal budgets running deep in the red. There is still no word coming from the U.S. Administration that they are in fact capable of containing the dollar decline, and in reality, there is little reason as to why they would want to.
Even thought the academic and analyst economic world is quite developed, no one at this point is clearly able to see what exactly the strong dollar policy consists of. Until now, it appears that this policy is made up of hot air, meant only to stop China and the other major Treasury holders from instigating a massive wave of sell orders.
The impact of such an action – BRIC countries shifting their reserves from the U.S. dollar - would be tragic for the global economy, since most asset bases are priced in U.S. dollars, in one way or another.
These days, the dollar index is preparing to breach the 75.00 support area, and to reach the lowest value in a little more than a year. These declines come as neither one of the dollar’s sentinels, the Treasury or the Fed, appear to want to do anything about the chronic weakness that the greenback is suffering.
The dollar’s current depreciation is very similar to the one seen during the 2007 and mid 2008, when the global economy was shinning on the back of a very strong business cycle, which proved to be a massive bubble just a few months later.
Even though a new bubble looks far off, the economy seems to be returning to a normal growth rate, helped by the huge liquidity created through the quantitative easing programs implemented by central banks around the globe, with ironically, the main liquidity being provided in Usd denominations.
In the history of monetary policy, there had been only one notable case of a central bank using quantitative easing, that of Japan in early 2000. However, until this day, the QE policy had no positive effects of note, as economist argue that Japan entered into a liquidity vacuum that it may not easily get out of.
Some will be crossing fingers and hoping that this does not happen with the Fed, BoE or ECB, as the dollar index makes its move towards the 75.00 area, or maybe even lower.