I Smell a Change of Dollar Policy in the Air

Joined : 30 Mar 2008 Posts : 41 Location : New York

Good Day Currency Traders! Very Happy

These days, it seems the key word in the global markets is "seems." And in my opinion, it seems there has been an implicit policy shift out there...

Old Implicit Policy: A weak dollar liquefies global markets and we need global markets to stay juiced to sustain global demand.

New Implicit Policy: A weak dollar is adding to global market risk. The Fed has trouble being the defacto global lender of last resort if the world does not have confidence in the global reserve currency.

And of course, we also have a continuous see-saw link between crude and the dollar that adds weight to the view of an implicit policy change.

The Market Could Get a Little Testy if Something Doesn't Happen Soon

We have seen a host of jawboning by the big guys like Bernanke and Trichet lately. And so far, the market seems to be listening, at least based on price action. It suggests there are some underlying sympathies/beliefs/guesses/conjectures that just maybe the bottom in greenie is near.

But - and this is the big but - if something concrete doesn't materialize from the boys urging others to buy the dollar, then we could see another violent "in your face" reaction by the market. In other words, down goes the dollar - out of sheer spite.

As to concrete things in a very fluid world:

1. The Fed signals its next move is up sooner rather than later. (Low probability in an election year, but increasing along with inflation.)

2. Concerted intervention on the part of the major central banks. (Still low, but an increasing probability to show the market they matter.)

Will the Fed Let Oil Prices Run Away Forever?

Another question: Will Fed monetary policy rein in the run in crude prices? Or put another way, do crude market dynamics change interest rates - especially when oil is considered a hiding place for dollar bears?

Who is leading and who is following? Based on what we have been hearing lately, it seems the big boys believe dollar weakness (euro strength) is leading the crude market, to some degree.
So okay, let's move on to concrete action potential #3: President Bush orders a significant release of U.S. Strategic Petroleum Reserves onto the market.

"The U.S. Strategic Petroleum Reserve is the largest stockpile of government-owned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy."

I'm not entirely sure if increasing crude prices represents disruption in supplies. But I do think the White House could easily explain that it does to voters - especially during an election year.

Hmmm...what I can say, with a reasonable degree of certainty, is: The dollar, compared to the euro, seems a lot closer to the bottom than it does to the top.

And if you have patience, and the proper risk/reward profile, something concrete may make one a lot of money in the months ahead...