Will the U.S. Dollar Continue Rallying?

By: Christopher_Laird

Now that we see the USD rising again over 81 on the US Dollar Index (USDX) the question becomes will we possibly see 91 USDX sometime in 2010?

Yes very possibly, and we may see more than that. Let me explain. Since roughly fall 2007, the US Fed has been creating liquidity and even buying markets directly (home mortgage bonds for example) then when the US decides to roll that back, there is USD strengthening as institutions who borrowed Fed money with bad collateral have to repo the stuff and get dollars to buy the stuff back (repossess them).

Then, on top of repo activity starting after the end of March 2010, the Fed stated they intend to roll back QE (actual Fed buying markets themselves) and this would be market negative, since half of Fed liquidity infusions in 2009 was invested directly in markets by banks, instead of lent out. The same goes for all of China’s stimulus, much of their own stimulus money and huge bank lending in 2009 went into their property and real estate bubbles.

Then, the US is on track to raise interest rates this year, after raising the Discount rate and other measures. China also is on track to raise interest rates, having raised bank reserve requirements to cushion expected bad loans. But if the US begins any regime of raising interest rates, the USD will rally.

If markets sell off worldwide due to all this monetary tightening here and abroad (some doubt that will really happen regardless) foreign markets will start to unwind, and that leads to USD repatriation as money is pulled from foreign markets and returned to the US. This creates a demand for dollars, and is USD bullish.

Commodity markets are peaking, and if they drop that is USD bullish, aside from the fact that a rising USD is commodity bearish…

Gold could correct but will stand up better than most things to a rallying USD because this entire situation (deleveraging) is a flight to cash in general, a rallying USD is merely the biggest example of that. Gold is THE cash, without peer.

The US T market is a huge bubble, but that is tempered by a potential world stock crash coming after QE ends in March in the US (Ostensibly. Some think the Fed might just continue it anyway if things are bad) and a bad crash combined with a rising USD would buttress US Treasuries for a few months.

In Nov 2009 we called for a USD rally to subscribers when the USD was about 75 on the USDX. It is now over 81. We called the gold bottom in Nov 2008. Gold rallied the whole year after.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2010 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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