Bucking The Trend?…It should be absolutely plainly obvious to everyone at this point that the direction of the dollar and many an alternative financial and physical asset class have been very highly negatively directionally correlated for some time now.  This has been especially true over the last year of economic and financial market volatility and has been nothing but reinforced lately with the dollar assuming the role of global carry trade vehicle (notice how much foreign sovereign debt has been dollar denominated lately?).  It should be no surprise as the US government has coincidentally been in the process of betting the fiscal and monetary ranch with its historic and unprecedented stimulus efforts.  And at least according to the CBO (Congressional Budget Office) estimates for the forward US deficit released a number of weeks back, this is not about to stop any time soon.  So the rise in many an asset class nominal price is as much about adjusting to and reflecting the reality of a declining dollar as it is about anticipating improving asset class specific fundamentals.

From a global perspective, in June we watched China sell the greatest dollar amount of Treasuries in one month on record, albeit a somewhat less than stunning 3% of their total holdings.  So far, this is a one off event.  Also on the global scene, the election in Japan last month may also mark a shift in policy regarding Japanese holdings of US dollars; we’ll just have to see how it all works out.  In Japan , the landslide election of the DPJ (Democratic Party of Japan) was more a refutation of the LDP (Liberal Democratic Party) than an overwhelming affirmation of the DPJ, but the fact is that the DPJ has made noises about wanting the US to repay its borrowings from Japan in Yen.  The DPJ has long criticized the LDP for its “closeness” to the US .  Not exactly a dollar positive comment or political backdrop, now is it?  And lastly as it pertains to the near relentless “adrift on a sea of government-sponsored liquidity” US equity rally of the moment, the very simple chart below simply confirms the importance of this negative directional correlation to the dollar.  Although this relationship may be broken some time ahead for all we know, it sure seems to imply US equities require a weakening dollar for further northward movement.

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