Major Progress rarely occurs in one major move. Mostly, the whole thing happens in waves. You take a step forward, then stop and look around; you consolidate. you take stock of your situation, and try to work up enough momentum to take another step. You might even have to give back some ground if you are unable to consolidate…for instance, if the step taken was a major one and covered a lot of ground.
This is what we are seeing in the markets. Over the last few months things have been tentatively moving upwards. The tide has turned, surely. Earlier on in the year, when we had all that bad news coming hard and fast, it was really difficult for things to head up. Any bad news was reason to sell-off and head for the hills.
That has now changed. Most are now convinced that we have seen the bottom. The news is now more positive, and the trend is up. Now, any good news is reason to go on a spending spree. Yay!
This brings us to the Dollar. For most of this recession, the Dollar has been a safety play, like the Yen. Dodgy situation = Buy Dollar…because your dough is safer in US Assets etc etc. This held true, even as it became evident that the situation in the US was not better than in Europe (for instance), and that the US was probably not going to lead the way out of the downturn.
The question always was “When will the US Dollar really start trading on Economic fundamentals?” i.e. If things stay bad in the US, will the Dollar continue to rise because of risk? Also, will the dollar continue to fall if risk increases and the US economy gets better?
Well, as things get better we will most probably – have already started to – settle into the standard mode of operation…Interest rates. Currencies with higher interest rates will start to see more investment. The reason is two-fold. First, higher interest rates mean higher return on investment. That is standard.
However, the second reason is quite important in this environment. Having the guts to raise rates means that you are confident that your economy is really recovering. That just makes your currency an even rosier prospect. Just look at how the Australian Dollar has performed after they raised rates this week – though it was already doing well.
With the US economy not doing so great, investors have had no reason to believe that the Federal Reserve will raise interest rates (exiting other quantitative easing strategies as well) here in the US anytime soon. They have traded accordingly. However, The FED Chairman, Ben Bernanke – Helicopter Ben as he is called, apparently because of his predisposition towards said strategies – hinted that they are also considering an exit, like Europe and others. Thus, the rush to sell dollars has been temporarily stalled.
No one expects the FED to do anything until we really start to see improvement in Job numbers in America. So, I guess the dollar is still likely to keep falling, if not as drastically as before.
I yearn for the old days…the days when my currency pairs weren’t so sensitive to daily news and rhetoric. I think we’re on the way back though. Just a wee bit more time.