Why is the U.S. Dollar Rising, Treasury Bond Market Failure 2010?

Posted by G. Abraham

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Now am not a trader nor do I rely on charts but those who do, tell me that dollar has broken a “falling wedge” and is all set to rally a great deal in the coming weeks. Most reaserch houses have put in dollar targets of anywhere between 78 and 83.

JP Morgan: 78
Morgan Stanley 82
GS: They still cant believe dollar is rallying let alone leaving a target.

Regardless what the dollar index may finally rally to, it is quite clear that dollar has done an about turn in its multi month fall atleast for the near future.

And that brings us to the object of our discussion: Why is the dollar rising?

There are 3 reasons all of which I have heard over the last 3 weeks:

Improving economic fundamentals:
Well well well. Am not sure how to say this. If you really think the economy has improved and it warrants the move of capital from high growth countries (China, Brazil and India) to a relatively low growth country with labor unemployment rate at 10% and banking failure touching 140 with deficit at an all time high of $1.5 trillion and a population that is increasingly dependent on federal aid, then am sorry to be rude, you need to do your financial education again and probably my suggestion, do not trade your own money. So when will I say economy has improved? For me economy will be on the mend when I see unemployment rate firmly below 8%. I need clear proof that jobs have been created in a sustainable period of 3 months. The fall in unemployement in Nov was aided by temp workers and not by permanent job creation.

Secondly, once the Unemployment picture stabilizes, I need to see FDIC bank default slowing down. Right now the problem list on FDIC site is 552 banks to fail. My own analysis is 1800 banks at unemployment rate of 9.8%.

Thirdly, I need to see a stable growth rate (Retail,auto, tech exports) when the QE ends.

Finally, I need the fiscal deficit well and truly below 6%. currently it is at a astounding 11%. Only UK is worse among the G7 economies.
If I see these few points clearly pointing to growth and stability, I will be the leader of the pack who will be bullish on the US recovery. Right now, US economy is under extended Quant Easing, and even then is not able to racket up a sustainable growth rate. Instead of an end to QE, they are talking of an extension of QE (read $400 bn blank cheque to Fannie Mae and Freddi Mac).

Now investors are not fools to have not seen these simple reasons and therefore I dont think it is investors who are bullish on the US economy who are driving up the dollar. Analyst and economist community by reason and history are nuts and in most cases are unaware of economic truths and therefore the folks who say “flow of capital back to US on back of recovery” should only be used as contrarian indicators in your analysis.

…..read more and view charts HERE.