The Parting of the Ways

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Then there's the open-mouth policy. Some monetary officials on both sides of the Pond have recently voiced concern over the shrinking dollar, while others have said that they think the U.S. economy will soon speed up while the euro zone will slow. The implication of these remarks is that the dollar should rise against the euro, and if the markets don't do this on their own, there just might be some sort of coordinated central bank intervention to push the buck higher that could occur at any time.

This has caused currency traders to hedge their bets. In recent weeks there appears to have been a swing to a net long position on the dollar, from years of a net short posture. Indeed, the entire short dollar-long commodities trade seems to be unwinding. Witness the declines in prices of such key commodities as oil, gold and many foodstuffs as the dollar has firmed. A stronger dollar will help both the U.S. and its trading partners, as long as it doesn't get too strong."

Footnote: Just after the latest open-mouth policy statement by the Fed, the market is now pricing in a 40% chance of a quarter-point higher Fed funds target rate by November - that is only three Fed meetings down the road. Obviously, whatever subtle dollar-supportive innuendo was contained in Mr. Bernanke's speech, it did not escape the attention of traders. Speculators now appear to be betting in less a homogenous manner and are placing more emphasis on the selected assets they believe will carry the day later in the year and into next year. Perhaps they are shifting gears a bit early, but shifting them they are, nevertheless. The daily numbers speak for themselves.

Happy Trading.