Thoughts On USD

I have had quite a few posts referencing the USD.

tradersutra.blogspot.com/2009/08/more-on-usd-and-china-decoupling.html

tradersutra.blogspot.com/2009/08/frb-balance-sheet-and-credit-crisis-2.html

tradersutra.blogspot.com/2009/08/global-rebalancing-is-happening.html

tradersutra.blogspot.com/2009/08/reasons-why-market-does-header-this.html

My primary motive for further dollar weakness is two fold:

1-Unwinding of Safety Trade
2-Strength In Equities leading to more investments in risk assets.

I still see these 2 catalysts as prevalent in the short term. The news flow has been decidedly positive, and there is going to have to be real bad news to reverse this course. There is many bad data points to look at and point to in the coming months, but short term I see further dollar weakness in this case. So a continued exit from safety to risk assets doesn't bode well for USD.

Bond yields are headed higher for fundamental and technical reasons, too much supply, etc.

One thing is the widening of the interest rate deferential with respect to Euro-Zone bonds. Again its not a linear relationship but a cyclical one. Currently short term US Rates are anywhere from 25-30 basis points higher then German 2 year yields. Once the economy gets a little stronger as everyone is expecting, you will have 2 year US Rates higher then 2 year German rates, which completely changes the interest rate deferential unto the USD side. This again wont happen over night, it takes some time.

Also the pattern of the USD acting better in the face of bad macro news, and sinking on better macro news might also unravel.

Mostly people are researching the Euro, Australian, and Brazilian currencies, looking for potential reversals. Especially the Australlian/Brazil, which are some 75% positively coorelated with the SPX.

To me its all about what investors risk appetites are, and currently they are very healthy. Which very short term means higher stock prices and a lower USD.