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Forex Blog - Weak US Dollar CycleGVI Forex Jay 16:38 GMT October 19, 2009
Weak US Cycle
1.50 is the current line in the sand although 1.60+ is more technically
important. Whether it makes it through 1.50 this time around is hard to
call but risk is for a lower dollar other than the periodic correction
- Zero chance Fed hikes rates near term
- Obama & Co are quietly promoting a weaker dollar - code word is "re-balancing" the economy
- So US will do nothing to support it - will only react if weak dollar starts to impact bonds and treasury auctions
It would probably take a fresh bout of risk aversion to force safe
haven demand for dollars and give the battered currency a reprieve.
Weak dollar cycle leads to the following:
- Dollar weakens
Those with dollar pegs or interventionist policies buy USD vs local
currency to limit currency appreciation => increase in dollar
reserves (Chine is a prime example)
- Diversification => Convert part of increased dollar reserves from intervention into other currencies
- Dollar weakens vs. majors from diversification
- Cycle continues
yourself how longer-term trends can reverse under these conditions
without US supporting the dollar by raising rates or a fresh bout of
Sounds simplistic and unsustainable but this is the hand we are being dealt. Feel free to comment.
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