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Greenback Down for the Count?

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But relief rally is possible before downtrend resumes.

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On Tuesday, the Federal Reserve signalled they were hell-bent on pursuing an "inflate or die" approach to rescuing the ailing US economy and fending off the forces of deflation. The Fed is now inflating at a level possibly not seen by a developed nation since Weimar Germany.

Since the credit crisis started intensifying in July, the dollar benefited from a global flight to safety in US Treasuries and a scramble for dollars to repay dollar-denominated debt. The deleveraging process effectively created a short position in the greenback.

But more recently, US-specific worries concerned with public debt expansion and the potential inflationary implications of quantitative easing dawned upon battle-weary investors, causing the dollar to reverse the uptrend that had commenced in July.

The US Dollar Index (i.e. a trade-weighted basket) has not only breached its 50-day moving average convincingly, but seems to be forming a top of at least medium-term significance (see chart below). The fall from grace was brutal with the Index recording its largest six-day decline (from December 10th to 17th) ever, setting up an assault on the key 200-day line (often seen as a crude indicator of the primary trend).


Click to enlarge


The US currency also suffered its biggest one-day slide against the euro on Tuesday, and plunged to a 13-year low against the Japanese yen. (Also see Prieur Perspective: 2008 in Like a Bear, Out Like a Lamb for my comments on currency movements.)
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