John Lounsbury

Three Possible Explanations for the Dollar's Strength

There is a fourth cause for the surge in the dollar: deleveraging. As the paper pryamid of debt is unwound, dollars are sucked into a black hole. The reason the hundreds of billions of equity the government has injected in the various bailouts has not put pressure on the dollar and fueled inflation is that these dollars are retiring debt and shoring up balance sheets. All these doilars are simply replacing money already spent. Until this process ends there will be deflationary pressure, spending contraction, little inflation and a stronger dollar. As long as hundreds of billions are trying to retire tens of trillions of debt, this trend will continue. This effect may be as large or larger as all the other things supporting the dollar, including the three described by Adam Katz.