USDX Pushing Higher as Money Flows into Treasuries [traderdannorcini]
June 1, 2012 Leave a comment
The following chart I put together is interesting in the sense that it reveals exactly what is pushing the US Dollar Index Higher.
Normally, all things considered, the country which possesses the most solid fundamentals in terms of monetary policy, economic growth rate, fiscal policy and above all, YIELD or INTEREST PAID on its government debt, tends to have the strongest currency. At least that is the way it formerly was. These are broad principles and while there are always deviations, if two countries were pretty evenly matched in terms of the first three factors, the nation which had a higher yield on its government debt tended to attract more investment flows and thus had the stronger of the two currencies.
When we think about the US Dollar, we certainly do not think of a nation with sound monetary policy (reckless creation of nearly unlimited units of its currency called Dollars). Nor do we think of a nation with a strong economic growth rate (we were reminded of that today with the lowering of the original 1rst quarter GDP number). And lastly, fiscal policy here in the US is an unmitigated disaster given the enormous and never-ending budget deficits and huge amount of overall indebtedness (the US is now at levels on its GDP to Debt ratio of 100% or higher).
Why then the strength in the US Dollar? It is certainly not fundamentally based.
The truth is investors in Europe are terrified of what is taking place over there and have lost confidence in the bonds of many nations comprising the EuroZone. They are yanking their money and moving it into anything but the Euro which is giving the US Dollar the strength it is currently enjoying.