I have been saying watch the US Dollar for clues as to equities. In a liquidity-driven market (aka a Bubble Echo market) the huge global monetary stimulus is popping up as rising equities and dropping Dollar.
Today the effort to bolster the buck has accelerated. Wave Theory noted 74.50 in the Dollar Index as a key level; apparently the break below 75 and the run down to 74.77, too close to 74.50 for comfort, has spurred a heightened effort by central banks to strengthen the Dollar so as to keep their currencies from rising too much. China sits fat and happy since they dropped their policy of a slow rise in the RMB and went back to a link to the Dollar last summer (2008), and it has kept them competitive with the emerging economies around them. Those economies – and some of the older Asian Tigers – have seen their currencies rise against the RMB as the Dollar drops.
It is an odd global economy when everyone is in a race to the bottom, including the US. Yet that is what all this monetary stimulus means. The US needs China to buy Treasuries, so has backed off putting pressure on them to let their RMB rise against the USD. In that dynamic someone gets hurt. Not everyone can race to the bottom! In the West it is Europe whose Euro is hovering at the $1.50 level; in the East it is the emerging economies who were taking manufacturing share away from China.
The many emerging Asian countries (ie. other than Japan & China) lack the scale to truly move the USD; so it is the intervention of the European ECB that is critical. News on this is mixed; an sketchy goldbug site claims a “secret plan” by the ECB to intervene. Geitner made the obligatory remarks supporting the USD in Singapore yesterday, and may have encouraged a coordinated effort by Asian central banks to intervene, but he lacks credibility. Perhaps the most telling snippet is the ECB indicating it is preparing to exit the heavy monetary stimulus. In any event, if the ECB is intervening they will try to keep it secret as long as they can.
If the US Peso has truly bottomed, it signals not the end of global monetary stimulus, nor end of the beginning, but the beginning of the end. Now the ball will go back to the court of fiscal stimulus: if the Fed begins to exit gracefully, with global coordination, but the US economy is still on government life support, Obama will have to come up with yet another Porkulus Stimulus in the new year.
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