The Federal Open Market Committee, the U.S. central bank’s policy-setting body, said it did not believe such speculative activity had taken place to date, saying the dollar’s decline had thus far been “orderly.”
Source: Reuters
I found this one statement to be very noteworthy. I’ve been posting US Dollar charts for months and noted how it has been declining in a very orderly fashion. For months I’ve been pointing to UDN and how it had been riding a trendline from March through October. In October, the trendline broke but the Dollar held its 50-day SMA. But, the trendline break was the first evidence that the trajectory of the decline was slowing.
Earlier this week I referenced a news article that mentioned that Europe’s tolerance for a weak Dollar was about $1.55:1. We’re at about $1.50:1 right now meaning that there is not a lot of movement down left if the article is correct. I also noted that the money flow into short term treasuries could be evidence of a short term currency bet on a rising Dollar.
Ok, so why is this comment noteworthy? Because when I post these charts and reference other articles it is all hypothesis and conjecture. You try to build an honest and unbiased case to figure out where the Dollar is headed since it is the catalyst moving all asset classes. When I build my case, whether stated expressly or implied, there are many assumptions built in.
One of those assumptions is that that the Dollar has purposely been weakened by the Fed in conjunction with other world bodies and that it is being done in a methodical manner. Could the trendline just be a coincidence? Is the fact that the 50-day SMA has not been broken also be a coincidence?
The fact that the FOMC has stated the Dollar’s decline has been orderly provides confirmation that the perfect trendline on the Dollar chart is no accident. The charts infer this and now we have the FOMC confirming it.
I continue to remain confident that in the near term they won’t let the Dollar breach the 2008 lows (and really the 20 year low). I believe the break in the trendline back in October is the first signal that the Fed and other central banks are in the process of at least putting the Dollar into a consolidation phase. The $1.55:1 limit on the Euro seems very plausible. It is very curious to me that Europe, Australia, Canada and other countries are not pounding the table about the weak US Dollar impacting their exports. Keep in mind, with the Yuan pegged to the Dollar both the United States and China are making the imports from other conutries less attractive and are making their exports more attractive.
So why is there no outrage? Because the central bankers in Europe, Austrailia, Canada (among others) know we’re about to get at least a pause in this orderly decline. They’ve agreed with the US (and perhaps China too) to go through this exercise to reinflate assets worldwide as part of a stabailizing process. But in my opinion (based on the foregoing) the writing is on the wall that that this weak Dollar policy is about at the end of its rope.