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“The decisive moment” for the dollar: the collapse is inevitable

In four years the dollar has overcome a huge distance from a record low in August 2011 to a record high for ten years in mid-2015.

«Решающий момент» для доллара: обвал неизбежен

An impressive rally of the U.S. currency due to the tightening monetary policy of the Federal Reserve system, which began in may 2013 when Bernanke and continued in December of last year when Yellen.

However strong the dollar is against the us economy. One has the impression, writes Daily Reckoning, after a weaker yen in 2013 and a weak Euro in the 15th now is the time to weaken and the dollar. Soft rhetoric, contributing to the weakening of the U.S. currency, has been mentioned in the statement at the March meeting of the operations Committee on the open markets (FOMC) and was personally confirmed Janet Yellen in a speech at the Economic club in new York last week.

Now financial markets are at a critical point when a strong currency contrary to forecasts of economists were among the losers. This trend in the foreign exchange markets cannot be called sensational, but it rarely occurs in the Forex markets unlike stock markets.

Of course, the main currency is not standing still. They are regular UPS and downs. It is possible to remember, for example, the history of the past relationship between the dollar and the Euro. In the last five years for Euro gave 1,48 dollar (29 April 2011), and 1.05 (15 March 2015). There is although large but still fairly clear range: no one expects, at least in the near future that the Euro will be worth 0.5 or, say, $ 2. I.e. in the currency market there are some critical limits for it.

Exchange rates are very volatile and their dynamics very difficult to predict in the short term. However, in the long term you can find some crucial moments when the dynamics is set relatively long. Apparently, now that the decisive moment comes for the dollar, says Daily Reckoning.

The main sign of approaching a turning point may be the behavior of Janet Yellen and the fed, namely their desire to increase inflation to 2% per year. Even the head of the main U.S. Bank wants to raise interest rates. But this leads to the strengthening of the dollar and deflation, not inflation.

Struck by the contradictory policy of the fed. As a result of purposeful actions of the fed under Bernanke and Yellen the dollar for two years, from December 2013 to December 15, increased by 33%. In the markets of securities such jumps in the order of things, on the currency markets, they – the big rarity. Including because the currency markets again unlike securities markets are quite stable and changes occur much slower. Therefore, the jump of the dollar can be considered the fed’s desire to “normalize” interest rates and end with a zero rates policy (ZIRP).

Normalization of the rates given the high price – inflation is not growing, and trampled on the brink of deflation. A strong dollar has as much throughout the US economy and earnings of U.S. companies and stock prices. It reduces not only the export of American goods, but the profits of American corporations abroad, which are translated back into dollars.

Deflationary trends does not allow the fed to reach the desired inflation target is 2% per year. This turn of the main American Bank is unable to achieve 8 years.

The Daily Reckoning believes that the office of Janet Yellen does not understand the collision of high interest rates, a strong dollar and deflationary trends, because they work on obsolete models. At the fed believe that the continued growth in the number of jobs creates a labor shortage, which allows workers to demand higher wages. High wages should accelerate inflation. However, no evidence that this is the correct model, because jobs are being created, but the special wage growth and inflation are not visible. On the contrary, visible growth of interest rates, strengthening the dollar and threat of deflation.

After it became clear that the fed will not increase interest rates in March, at the end of February – beginning of March the dollar has weakened. However, in late March, this trend stopped because the Agency Yellen hinted that it may raise interest rates if not in April then in June. Last week Janet Yellen dotted all over the April increase, and the dollar again dropped a little.

Many economists are now waiting for the fed to realize that their model was wrong and try to reach the inflation the old tested way – looser monetary policy and a weakening dollar.

Apparently, this point is approaching but not yet arrived. Most likely, the fed will raise rates in June and will continue to make tough statements about future enhancements. But sooner or later the weakness of the U.S. economy and securities markets will become obvious even to the main Bank of the United States. Somewhere at the end of this year and there will come a decisive moment for the dollar, which will serve as the beginning of currency wars.

Obviously, realizing the need to change course after about six months, the fed will begin to soften monetary policy: will begin to send market signals about their actions, reducing interest rates, and, possibly, to negative numbers; throw a “helicopter” money, conduct a fourth quantitative easing program. This will lead to the weakening of the dollar and increase inflation to the desired level, says the Daily Reckoning. Then the fed’s motto will be: “Better late than never!”.

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