Wednesday, November 18, 2009

Everybody's Dissing the Dollar

I don't have anything concrete I can point to but 1.50 EUR/USD almost feels as if someone has drawn a line in the sand. As more and more money piles into the trade without movement past that line you start to lose the mo-mo traders and the psychology can shift fast.

If the buck were to turn and head back to say, 1.20, the results for equities and gold would be painful.
I'm just sayin'...

From Barron's Up and Down Wall Street column:

Notwithstanding the Fed's rare statement of support, the buck buckles further. The bearish dollar trade gets more crowded.


Departing from the Federal Reserve's usual reticence about currency matters, Chairman Ben Bernanke said Monday the U.S. central bank is "attentive to the implications of changes in the value of the dollar."

But apart from a momentary lift, the U.S. Dollar Index slumped to a 15-month low following Bernanke's statement of support. And to underscore the markets' vote of no-confidence, gold rose to yet another record while crude oil gained 3%.

In a luncheon speech to Economics Club of New York, the Fed chief also reiterated the central bank's intention to hold the federal-funds rate at rock-bottom levels "for an extended period." So, the currency market realized the Fed wasn't going to back the chairman's words with interest-rate increases....

...Last week, Chinese officials appeared to be acknowledging the impact of their falling currency. Now, their harsh criticism of U.S. policies suggests they are unlikely to resume allowing the RMB to appreciate, as they did for more than two years through mid-2008.

At the same time, U.S. officials show no intentions of taking action to halt the dollar's slide. In a world of ultra-low interest rates, a dramatic hike in the fed-funds rate all the way to 1%, from 0-0.25%, would do little to add to the greenback's allure. The key is to reduce the trillion-dollar-plus fiscal deficit, equal to more than 10% of gross domestic product, which is plainly unsustainable.

The market knows that the Fed is unlikely to raise its policy rate at all until U.S. unemployment begins its descent, which won't happen until the second half of 2010, if then. And it knows that the Administration and Congress won't take a knife to the budget.

So, the path of least of resistance for the dollar remains lower. Everybody knows that already, however, which makes shorting the buck a very crowded trade.