Countless times you’ve heard: Well, with the Fed printing all this money, the dollar is only going down from here.
There’s logic to that, of course: more dollars would seem to equal less value for each one
In practice, there doesn’t seem to be anything to this. Hilariously, the commencement of QE2 was basically the exact bottom of the dollar index. So since QE has begun, the dollar is up significantly.
Well, you say, there’s the Europe issue, so naturally that’s going to help the dollar catch a bid. Flight to safety and all that. That’s fine, except for the fact that the dollar has been rallying against the yen, too.
Ok, well maybe this is just kind of a sell-the-news thing. The QE weakness got fully baked in to the dollar, and now naturally there’s going to be a little bit of a change once the news hits. Yet what’s funny is that even today, on the news that the Fed was EXPLICITLY aware of QE’s possible effect on weakening the dollar — that came out in the Fed minutes — the dollar spiked some more.
The thing is, there’s a much simpler explanation. During the period from early September to early November, we enjoyed a period of global stability and improving economic data, and thus there was little desire to hold dollars. Since then we’ve been buffeted with headllines out of Europe and Asia, and so the risk off trade is back, and dollars are back in style.
What’s so hard to figure out?
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