The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- The U.S. Treasury has been actively promoting a public strong-dollar policy, at a time that the greenback continues to decline against virtually every other currency in the foreign exchange market. Something has to give, and there are compelling reasons to think that upcoming dollar movement will be strong, on both the long and short sides of dollar index trade.
A strong U.S. dollar has an impact on globally traded markets as well as on regional growth outlooks, a fact which overseas central bankers have highlighted on every possible occasion. A strong dollar would reduce soft commodity prices, as well as oil and precious metal values, and would also reduce the global inflation rate, thus supporting consumer spending.
However, a stronger dollar is just not happening despite the U.S. administration jawboning, as the currency market continues to price in the twin deficit that the U.S. economy faces, with both the trade and fiscal budgets running deep in the red. There is still no word coming from the U.S. administration that they are in fact capable of containing the dollar decline, and in reality, there is little reason as to why they would want to.
Few people are able to clearly define what exactly the strong-dollar policy consists of, outside of the administration attempting to stop China and the other major Treasury holders from instigating a massive wave of Treasury note sell orders. The impact of such an action -- BRIC countries shifting their reserves from the U.S. dollar towards bullion or mix of regional currencies -- would massively impact the global economy, since most asset bases are priced in U.S. dollars, in one way or another.
The dollar index is once again preparing to breach the 75.00 support area, and to reach the lowest value in a little more than a year. These declines come as neither one of the dollar's sentinels, the Treasury or the Federal Reserve, appear to want to actually do anything about the chronic weakness that the greenback is suffering.
The dollar's current depreciation is very similar to that seen during 2007 and mid 2008, when the global economy had expanded on the back of a very strong business cycle, which proved to be a massive bubble just waiting to pop. Even though a new bubble looks far off, the global economy seems to be returning to a somewhat normal growth rate, helped by the huge liquidity created through central bank's quantitative easing programs around the globe, with ironically, the main liquidity being provided in Usd denominations.
In the history of monetary policy up until 2007, there had been only one notable case of a central bank using quantitative easing, that of Japan in early 2000. QE policies seem to have had no positive effects of note in Japan, as economists argue that the country entered into a liquidity vacuum that it will not easily get out of.
The QE programs instigated by the Federal Reserve over the last two years are still being questioned in regard to their sustainable impact on the economy. As yet, the main beneficiary looks only to be higher global inflation rates, courtesy of a weak-dollar policy, that is not backed by generic growth. Inflationary pressures without growth create questionable economic outlooks.
As for the dollar, there looks to be a technical reason to possibly see a bounce higher off dollar index support, which would test the resolve of the record amount of short positions now held. Fundamentally however, there looks to be just as many reasons to see a test of 72.00, which would be in-line with S&P 500 futures trading around the 1350 area. However, a move lower in global equity trade would support a move higher on the dollar index, with 1275 on the S&P 500 being an inflection point that would see the dollar index trading around 78.00.
Inter-connected global market trade is creating new benchmarks for traders to work from, but as yet the dollar index has not been able to drop in-line with equity market expansion. That may have a lot to do with central bankers working frantically to stop the greenback decline, and by default trying to contain inflation that is building without supportive growth. The next three months may prove to be pivotal for dollar index trade, with weekly chart closes above 77.50, or below 75.00, likely to set the tone for where the dollar subsequently trades.
The fact that the Fed is highly unlikely to consider an increase in the overnight lending rates until 2012 also leaves the dollar susceptible to selling pressure, as expectancy builds that overseas economies will have to raise their own rates if inflation continues. The path of least resistance may be a near-term technical bounce higher, followed by dollar index declines through 2011. Signals and alerts will be sent to clients on currency, equity indices, oil, gold, and silver, as the second quarter of 2011 gets underway, and price action evolves.
Marco Hague is one of the founders and principals of The London Forex Broadsheet (commonly known as TheLFB), a global forex trader portal with headquarters in the U.S. Hague began his career with the Bank of England dealing with foreign exchange control, and he has been trading for the last three decades. He has been involved with institutional risk asset ratio analysis and the implementation and maintenance of institutional trade desks globally.