Return of Goldilocks: What About the Greenback?

The assessment from the Congressional Testimony is that the economy is moving along comfortably. There are concerns, however. Inflation is the number one.

There's something to ponder within that inflation. Bernanke has pointed out that the job market is tight. We're sitting at 4.7% unemployment. Economists consider 5.0% to be full employment, which means we are beyond our full "capacity". This also means that jobs are easy to find, and that employers are likely to have a tough time filling jobs. Ask yourself this question: How would an employer begin to fill jobs in such a tight labor market? By offering more. And that, my friends is going to push inflation up even more.

So, Bernanke has his eye on the labor market as well as energy costs. For now, the Fed feels comfortable with where things are. As traders we'll need to keep our eyes on employment as well as energy.

But, what about the greenback? With labor reaching levels not seen since the last Goldilocks economy, way back in the mid to late 1990's, why has the greenback been softening? Great question, glad you asked.

Right now, the trade du jour is the carry trade. It's ballooned to such a high level over the past couple of months, that it seems to be the only trade worth eyeing up. For now, any currency that is likely to see interest rate moves, is the currency that is likely to appreciate/depreciate. Great Britain appears to be poised for interest rate increases, along with the Eurozone. These two currencies are the one most likely to appreciate. The dollar... well, Big Ben just said that he's comfortable right where things are. That means a lower dollar.