Dollar Debasement Continues

My finger has not exactly been on the pulse given that I am currently on leave and trying to avoid spending much time looking at markets but like an addict it is difficult to stay away. So here are some thoughts on the current state of affairs.

The dollar remains in trouble and not much has changed on this front. It’s hard to believe that the Fed FOMC meeting will change much from this perspective.

The bottom line is that the debasement of the dollar continues as the Fed’s printing press remains in full swing, at least until the end June when the printing press will shut down.

Added to the dollar’s troubles is the jolt of reality given to the US administration and Congress that the country’s AAA rating should not be taken for granted. Whilst an actual credit ratings downgrade looks unlikely the US fiscal/debt situation looks precarious at best. The USD may benefit if the ratings action forces officials into action.

It’s pretty difficult to believe that the EUR is now eyeing the 1.50 handle versus the USD but that the reality. A stronger currency bodes badly for the periphery in the eurozone, making economic recovery all the more difficult. The truth is that the strengthening of the EUR is far more negative than the recent rate hike by the ECB. Nonetheless, the currency continues to float on thin air.

However, weak dollar and Fed QE means continued strong capital inflows to Asia, stronger Asian currencies and more diversification by Asian central banks as they soak up USDs via intervention and then diversify into other currencies, benefiting the likes of the EUR and AUD in particular. Unfortunately for the USD there is not much to deter this trend currently.

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