We all know that there is generally an inverse correlation with the movement of most commodity prices to the U.S. Dollar. More recently, that correlation has spilled over to the equity markets. In fact, over the past couple of years (the days of easy-money) the correlation between a sagging dollar and a rallying stock market has become much closer.
Of course there is a reason for that. The fact that the easy-money policy has provided for an excessive amount of risk capital to flow into equity markets is just what Mr. Bernanke has wanted. This is the wealth-effect that the Fed discusses.
It is as if the grand plan created a gigantic carry-trade by shorting/selling the U.S. Dollar and using it to fund equity/futures purchases. Looking at the CoT report (Bloomberg) it is obvious that most passengers are one side of this ship.
Why not? Looking at the world, there is not much of a compelling backdrop of growth that will support significant monetary tightening.
Then the obvious conclusion is that the U.S. Dollar will remain under pressure as we are unable to get our budget and debt down to reasonable levels. In addition, it is “good” for American companies to have a weak dollar as it helps with their global competitiveness. Until we see some action otherwise, the dollar should remain the black-sheep of the currency world as the U.S. Government and the Fed continue their assault on America’s currency.
(Where is Peter Schiff when you really need him?)