FOREX TRADING

Just two weeks ago, analysts were singing about afresh day for the Greenback, which had arisen on the foundation of good news for the first time in months. In hindsight, it seems like such talk was premature, as the US Dollar has returned to its old ways. Good news once more drives the Greenback to fall, while bad news drives it to rise.

This development (or lack thereof) suggests that investors may have gotten ahead of themselves, when they sent the Dollar soaring after the employment picture brightened slightly. At the time, the news was interpreted as a signal that rate hikes were imminent. On a broader level, it was a signal that investors had dumped the paradigm of risk aversion, in favor of a model based on comparing economic fundamentals. Since then, investors have slowly moved to distance themselves from the notion that the Fed will soon rise rates, and in the process have moved back towards trading based on risk dynamics.As a result, positive news developments over the last couple weeks have coincided both with a rise in equity prices and a decline in the Dollar. When the Chinese stock market collapsed one day last week, investors reacted by dumping high-yield assets, and moving temporarily back into “safe haven” currencies. “Diving Shanghai Helps Dollar” read one headline. “Worries over the continued fragility of the world economy outweighed a firmer tone in overseas equity markets to underpin the U.S. dollar versus major counterparts,” explained another report.

In the meantime, a divide is forming among fundamental analysts. There’s one school of thought which argues that the US will be the first industrialized economy to recover, and hence the first to hike rates. Based on this line of reasoning, and then, positive economic news provides a foundation upon which to buy the Dollar. A competing school of thought, in the meantime, has recommended that regardless of if/when a US recovery materializes, it will be overshadowed by out-of-control inflation. In this regard, then, the Dollar isn’t such an attractive buy.

No less than the venerable Warren Buff has insisted that the Fed’s quantitative easing program and the US economic stimulus plan – while necessary – threaten to create even bigger problems than the ones they purport to solve. “But enormous dosages of monetary medicine continue to be administered and, before long, we’ll need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself,” he said.

Whenever this true, and then the Dollar is damned either way. Damned in the short-term as a result of a pickup in risk appetite, and damned in the long-term due to inflation.