The US dollar index             was a thing of bubbly-beauty, gaining over 25 percent in a year. Traders thought that after seven years, it is now time for the Federal Reserve to raise rates. Unfortunately, reality is set it.

The Fed has always claimed to be data-dependent. First, the potential for a rate hike was when unemployment dropped to 6.5 percent. That came and went as quickly as Americans dropped out of the workforce. Central bankers are no more than politicians. They will tell you what you want to hear, when you want to hear it.

Fed Chair Janet Yellen then stated that a "broader" approach to economic data would be taken, and as long as the economy was improving the likelihood of a rate increase. Only one problem - the data has been horrible. Forget mouthpiece economists, like DB's Joe LaVorgna, who paint a "recovery" picture regardless of how bad the data is.

Before Janus Capital's Bill Gross or DoubleLine's Jeff Gruanloch, I been a firm believer that the Fed cannot normalize monetary policy because the multiple asset bubbles are derivative of their reckless quasi-monetary experiment, fathered by Ben "there's no housing bubble" Bernanke.

The modus operandi of the Fed is inflation , but the global economic climate is deflationary. It is interesting how all the developed nations, including China, has embarked on quantitative easing or other stimulus only to find inflation declining.

If the Fed needs inflation , they need a weaker dollar; and increasing interest rates would only strengthen it. The Fed has to prolong the rate hike because it prolongs the inevitable crash. If the Fed truly though the economy was strengthening and weakness was transitory, policy would have been on a path of normalization.

But the Fed is not the first to make this mistake. Forex traders remember that the Bank of England was really the first central bank the market was looking to hike rates.

After the polar vortex in the US, the England was gaining some economic steam, and the Sterling rose much like the dollar did, reaching a high of 1.71 ( GBPUSD             ). BoE Governor Mark Carney did not have the courage to tighten policy, and the Sterling collapsed. The good economic data points fell from the highs, much like in the US now.

The dollar's decent is one of market participants loosing hope of a rate increase on the back of lackluster data with many data points at or approaching levels not seen during the Great Recession.

However, the paradox is that the dollar will likely remain elevated on a retaliative basis. I expect the DXY             to have an 80-handle by mid-summer, but I do expect the dollar to rise again as the economic outlook darkens.

Consumer prices will likely to fall, and there is the potential for a brief period of deflation - like we saw in 2009. The Fed will have no choice but to enter the currency wars.

Key daily levels are posted on the chart. Please check out the attached tradingview post. It shows how the dollar traded following 20+% gains - and it's not favorably!

Feel free to contact me or check out my work:
Twitter: lemieux_26
As scary as that chart looks, I see that happening. I have a few SPX charts I posted a while back targeting the 500s I believe. Take a look and the 2000 crash and the move that led into it. It looks a lot like the current "bull" market but this time it's condensed.
for Fed to raise rate
DXY has to drop further, aint it?
+1 Reply
That's what I think. A path to normalizing policy strengthens the currency, therefore it has a deflationary tone to it. I do not see how the Fed can in a rapidly decelerating economy. Even on the silver of chance they do, 25 bps is still on the lower bound.

NY Fed Pres. Dudley came out and said the market's reaction greatly influences the path to tightening, even leaving the option of reverting course open. St. Louis Fed Pres. Bullard said we should tighten yet remain accommodating. What does that even mean?

The market is ultra-rate sensitive. We've seen it in the housing market with mortgages. A 50 bps bump for already historical lows cancel a large portion of buyers out. Same thing happened after the recession with retailers.

Consumers got so use to everything being discounted that inventory had to be continuously marked down to drive in any traffic.
+1 Reply
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