Fundamental Analysis
the year at 79.5 and currently at 79.66-which, given everything, is maybe even more amazing than the Euro move in a way. That said, as far as tracking the Dollar we
tend to prefer the
Federal Reserve’s Trade-Weighted Dollar Index, currently trading at 73.85 from 74.28 at the start of 2011. An incremental difference from the DXY, yet one of them shows a small gain (DXY) while the other shows a small loss (TW$).
During research we have found that a potentially more accurate analysis of the Dollar’s performance over time may be more likely and achievable by taking the trade-weighted index because it’s rebalanced according to actual trade relationships, whereas the DXY indicates the general international value of the USD by averaging the prevailing exchange rates between the Dollar and
major world currencies.
Although the chart below only shows the moves in 2011 and
Richmond Federal Reserve President Jeffrey Lacker
the Dollar’s recent rebound, the fact remains that since the index’s inception in March 1973 the USD has lost over 25% of its value in real trade-weighted terms, perhaps a disturbing and concerning picture for many trend followers. The Dollar simply does not go as far as it used to and surely one can only buy so many ‘cheap’ flat-screen TVs before the true inflationary
impact of a soft currency is felt. To give the Dollar some short- term credit though, it’s probably fair to say that the chances of QE3 now look slimmer than ever, as signs of dim growth appear in both housing
and employment
data (Housing Starts reached their best level since April 2010
and Labor Department US TW$
says unemployment fell in 43 states during November). GDP estimates for Q4 2011 also look in decent shape for moderate growth of around 3.5%; in fact Richmond Federal Reserve President Jeffrey Lacker stated today that the Fed is unlikely to ease monetary policy further given the U.S.’s steady if moderate pace of economic growth with unemployment waning and GDP as a whole for 2012 projected at around 2.25%. Steady and moderate sure beat the dire alternatives so recently feared and, so far, stared-down.
FX TRADER MAGAZINE January - March 2012 11
FX
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