Tuesday, November 4, 2014

The Dollar Reversal: Or How I learned to Love a Strong Currency

Through this past spring, The U.S. Dollar had spent much of the preceding two-years weakening against the Euro, despite the currency union’s sclerotic growth, inability to implement structural reforms and the prospect of disintegration lurking in the shadows. With demand for USD-denominated financial assets riding high and heightened geopolitical risks nudging investors back towards the safety of U.S. shores, one would have expected the USD to have powered past its advanced economy peers.  The odd performance of the USD during this period may have been chalked up to America’s long-standing inability to catalyze growth and even longer-standing inability to address chronic fiscal imbalances. As the world’s default reserve currency, built-in demand for dollars has enabled the country to get away with spending more than it earns in a manner that would have sent investors fleeing from less revered currencies. The Federal Reserve’s balance sheet also provided about four-trillion other reasons why investors acted as if the USD was radioactive; the fear being that with that much (potential…but not deployed) liquidity injected into the economy, authorities may be unable stay ahead of a wave of dollar-crushing inflation in years to come. What a difference six months makes. (to continue reading please click here)

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