The market had already put together a few up-days in mid-March, but what really got the great v-shaped rally going was the announcement by Ben Bernanke that he would use his power to buy gobs of government and mortgage debt, in an attempt to lower interest rates beyond what he could do merely by cutting.
That’s when the dollar began to tank, and ever since then it’s been maximum pain for the bears.
The question on everyone’s mind is: will Bernanke write the final chapter on Monday, when he delivers a speech in New York.
Morgan Stanley: We continue to believe that the dollar and sterling will remain the main global funding currencies over coming months, until there are signs that either Central Bank is likely to change policy
Several Fed speakers this week have had the opportunity to downplay growing market concerns about inflation expectations with the five-year breakeven inflation rate five years forward making new highs over the past week and gold rising relentlessly even on days when the dollar has performed better.
The yield curve has also continued to steepen, which has typically been associated with concerns about monetary policy being behind the curve and dollar weakness.
Federal Reserve Chairman Bernanke’s New York speech on Monday will perhaps now be key in determining the path of the dollar into year-end; any hawkish hints will likely lead to dollar strength.
Meanwhile, the dollar’s threat to the market could be significant, if the greenback moves towards anything near “fair value.” This is always a dicey thing to compute with currencies (or with any market), but at least you can get a sense for how extreme the current move has been from this chart (via Morgan Stanley)
This chart, meanwhile, suggest that the Euro is significantly overvalued against several currencies.