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Strong Dollar Equals US Economic Trouble

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Somewhat lost in all of the commotion surrounding events in Europe is the impact of the stronger US Dollar on the US economy. There has been an unmistakable inverse correlation between the strength of the USD and gauges of US manufacturing over the course of the past three years.

A strong USD looks like it is going to be with us for a while and it is only likely to get stronger as the European fiasco progresses. This is just going to put further strain on the US manufacturing sector that is already plummeting according to the national ISM for June and the more recent regional surveys.

US manufacturing is a relatively small percentage of the US economy, but it has an outsized impact in terms of determining the direction of the cyclical trend.

I will repeat here what I have been saying since early this year: There is real risk of a zero handle or even negative GDP growth by 3Q 2012. A negative inventory swing alone can get GDP into negative territory.

I don't think the market has absorbed this prospect.

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