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Futures Trade Desk- Strong Dollar Policy Bounce or Bump

Trade Desk Client Note

Global Futures Review

Strong Dollar Policy- Bounce or Bump

The U.S. Treasury says that it is actively pursuing a strong dollar policy (no laughing at the back), but the greenback continues to decline against virtually every other currency in the foreign exchange market.

It is presumed that a strong U.S. dollar is in most people's interest. A strong dollar would reduce most raw commodity prices, reduce the global inflation rate, thus supporting consumer spending. However, a stronger dollar is not happening as the currency market continues to price in the twin deficit that the U.S. economy faces, with the trade and fiscal budgets running deep in the red.

There is still no word coming from the U.S. Administration that they are in fact capable of containing the dollar decline, and in reality, there is little reason as to why they would want to. Few academics are able to clearly see what exactly the strong dollar policy consists of.

Until now, it appears that this policy is made up of hot air, meant only to stop major Treasury holders from instigating a massive wave of liquidation orders.

The impact of such an action – BRIC countries shifting their reserves from the U.S. dollar - would be harsh for the global economy to absorb, since most asset bases are priced in U.S. dollars, in one way or another.

The dollar index trades at a major swing point support area around 73.90 support area, and holds above the lows of the year at 72.50. Neither one of the dollar’s sentinels, the Treasury or the Fed, appear to want to do anything about the chronic weakness that the greenback is suffering.

The dollar’s current depreciation is very similar to the one seen during the 2007 and mid 2008, when the global economy was shinning on the back of a very strong business cycle, which proved to be a massive bubble just a few months later.

The subsequent attempts at recovery have been aided by huge liquidity created via quantitative easing programs implemented by central banks around the globe, with ironically, the main liquidity being provided in Usd denominations.

In the history of monetary policy there had been only one notable case of a central bank using quantitative easing, that of Japan in early 2000. However, the QE policy had no positive effects of note and economists argue that Japan entered into a liquidity vacuum that it may not easily get out of.

Some will be crossing fingers and hoping that the current global liquidity vacum does not extend much further, with the Fed or European central banks watch as the dollar index makes its move towards the 72.50. The calls from the US administration for a strong-dollar policy are not working.

That may not stop the global reserve system stepping in at these levels and sending the dollar index back up to test 77.00, as happened in June 2011.

It may be too early to step into short-dollar positions for the long-term at these levels. An upside dollar move may be the path of least resistance, unless the low-volume ramps higher in equity trade can move S&P 500 trade through 1250 resistance.