techy

A Closer Look at the Dollar Rally

i dont believe in trade deficit or budget deficit being the reason for dollar weakness.

its the weak economy with slow growth and falling asset values led to flee of dollar investment to other currencies.....you can add solid emerging economies and their stock markets.

and then people piled on to that with dollar short trades adding more to the downside of dollar.

usa stock market wan not making money so people piled on to energy and commodities.

but now emerging economies stock market is no more attractive...in fact its risky so money is coming back into usa....

energy and commodities bubble is deflating because global economy has started cooling down due to usa cooling down....

and then we have reached the point where FED has signalled that its done with rate cut and it may increase rate(they wont do it, no need to do it now) which means its almost the dollar bottom.

yes usa financial sector is still not done writing down....housing may not recover till early 2010...job market has just begun showing signs of weakening...all in all its definitely not a show of strength.

but one does not have to be strong....if one is the least weak in the whole group...then it becomes the leader.

so its a sign of the fact the usa is still the leading economy of the world....the most reliable for investment....hence people will still buy usa treasury even though its yield is negative if inflation is taken into account.

for a long term policies/conditions were USD un-friendly....but now they are neutral, and this may be that bounce.

its also possible that Europe, china, india etc do not want dollar to go down since its hurting their exports and hence they may have helped this rally.

but right now USA is not the favorite investment destination due to all the maladies, hence i dont think this rally of USD will last more than another 7-10%, its mostly a trading rally right now....with people reversing their bearish USD positions.

if USA economy recovers...we wont be talking about 1.6USD=1EURO, it will become the other way around.

the weakest link in the whole scheme of things....housing. and there is no short term solution to that since housing is still expensive compared to income.

and to add more fuel to the housing problem we have credit market problems....making it difficult to get mortgages without substantial down payment...

the above two have added enough negativity to the macro-economy that we may also end up going into a long recession if right now companies start cutting corners in anticipation of slow economy.....leading to lay offs....more foreclosures....more credit market turmoils....its like a vicious cycle.

but i am not giving up yet....the job market has held up so far......and the FED has so far supported the financial market.....only if they can make the 30 year mortgage rates go down to 5%.....start giving loan with only 5% down payment, we may start digging ourself out of this hole.

but its near impossible to make mortgage rates go down and issue loan with less down payment because of the inherent risk in this melting housing market......i guess we need some kind of federal housing assitance as a back stop so that we can stop sliding backwards...

i am sure house prices will fall enough in 8-14 months that they will become affordable....but we need the mortgage market to offer better deal to get it moving....ton of people like me waiting on the sideline to buy a house.