Is the USD May Fall on ISM Data, Virus Fears, Inflamed Fed Rate Cut Bets? If you’re buying stocks, commodities, currencies, or shares of real estate, real estate trusts, or any other stock market asset class, this is a question you may be asking yourself right now. To help answer it, let’s look at a few questions.
First, how far do we need to go down the chart of the USD? Once you get into the ranges that are considered “risk” territory, then you need to watch for inflation and inflationary pressures, and watch the US Treasury bond yield curve as well. You also need to watch the S&P 500 index and other commodity indices as well as the U.S. Dollar Index as they all point to more of a threat to the USD.
Here is where a lot of people get confused. As I mentioned earlier, the current situation looks like it is ripe for a big correction and it might even happen, but we’re still some time away from that. But what if the Fed does cut its fed rate by a few points? When will this happen?
Well, you might have seen this argument before…that the Fed is planning to do this because it believes that the dollar will fall. And because of inflationary pressures that it believes will result from such a move, it plans to cut interest rates. Then, the USD will begin to drop and they’ll use this to justify having their cuts, right?
So is the idea that the Fed has already “decided” to do this? Maybe. But they have plenty of time to pull back, and they may not do so at all.
In fact, one of the things that you should be paying attention to as of late is the recently released report from the Federal Reserve Bank of Dallas titled “Recent Developments in FX Trading Activity”, and from which the following article was drawn:
This paper is a great way to keep up with currency-market news, and I think it’s worth reading. (It is part of the Financial Stability Report series for the New York Fed.) And of course it shows the current situation as well as the “big picture” of the markets.
Of course, that is what all market research does; it looks at the bigger picture, and at the current situation in the U.S. dollar-based markets. So we can all assume that there will be less inflation in the United States over the next few years, but that’s not the only factor to look at.
The main thing to keep in mind is that the dollar may be under some level of pressure, and in fact, this pressure has been building over the past several months. I believe that the coming year is going to see further volatility in the U.S. dollar as a result of the impending global economic crisis, and that’s going to push the dollar up. This is good news for everyone who’s selling dollar-based assets or bonds, as it’s going to reduce the price of those assets (and others) over the next few years.
This is why I’m not worried about the situation and why the US Dollar Index is moving up, but I am worried about how inflation is playing out, as this will create a major problem for the US Dollar. It’s one thing to speculate about just the dollar, but there are many areas where the markets will react negatively to rising inflation, and there’s a whole bunch of things that can go wrong for the USD (like other currencies too).
There’s a lot riding on the exchange rate of the USD, and if you’re not watching it, you might get taken out of the game. The US Dollar Index and the US Dollar are connected, so don’t let that happen.