Beware of the Falling Wedge
Beware of the falling wedge reversal. The dollar index is likely to trend down in a somewhat orderly fashion until more stimulus is introduced. Since the 2008 crash, not only is the deficit spending and Fed action bolstering equity and bond prices, it is keeping the US dollar alive.
The stimulus usually produces a short term rally in the dollar followed by a period of withdrawal from the freshly printed medication. The stimulus will lose effectiveness as it is reapplied until further stimulus has virtually no effect on the dollar or the overall economy. The next stimulus will provide less momentum on a dollar for dollar basis. That being said, the next monetary stimulus is likely to be larger than the Fed's QE2, so the magnitude of the "QE3" effect may be quite similar to what we have seen in the equity and commodity markets. More faith will be lost in the reserve currency and the overall trend will be a flight into hard assets, just as we had seen up to QE2's announcement and then amplified by QE2's commencement.
All in due time.
Why is everything the opposite of what I think ahhh, I thought more stimulus would mean a weak dollar.
ReplyDeleteRick
Hello Rick, the dollar is still a risk off asset, but but recently flights to safety upon geopolitical turmoil have gone into other places. Short term rally into the stimulus mania and a longer decline in the dollar would result.
ReplyDeleteSo more stimulus would eventually mean a weaker dollar, but short term would likely mean a small rally in the USDX.