The Economy and the Dollar

The Economy and the Dollar

The dollar has extended an aggressive an unremitting selloff this past week; and considering the fundamental basis for the move, the slump could certainly continue. Three months ago, an analysis of the greenback’s health would be assigned to one of three factors: growth potential; interest rate potential or risk appetite trends. In recent weeks, these three pillars of price action have essentially crumbled as traders have turned their attention to a more rudimentary dynamic of value – the money supply. If money supply is so imperative, why has the term not circulated through the financial headlines more frequently? In fact it has. Growing speculation that the Federal Reserve will soon expand its stimulus program is a natural amplifier of funds in the system. In the central bank’s current program, they are keeping a $2 trillion floor under stimulus by purchasing Treasuries with the proceeds of principle repayments on mortgage backed securities. Many believe this figure will actually increase by as much as another $1 trillion as the economic recovery continues to decelerate. With more dollars circulating, the value of currency is naturally depressed. However, if this is the primary catalyst behind such an aggressive tumble from the benchmark currency; what happens if speculation never becomes reality? Furthermore, what if the focus on stimulus is distracted by a swell in risk aversion flows? It is an aggressive but speculative trend.