For the last few months, we have been seeing a rather interesting trend in the U.S. dollar as far as forex trading is concerned: Strength when the economic data is bad. Indeed, Kathy Lien in FX360 points out that weak economic data is one of the reasons that yesterday's euro rally is a false start. And today she appears to have been justified: Both the sterling and the euro are giving back gains in forex trading.
Which means that we're back to the strange relationship that the U.S. dollar now has with bad economic news. Instead of dropping as the economic data does, the greenback has been gaining. The answer this:
Even though the U.S. economy is in trouble, the dollar is still consider one of the most stable and safest currencies in the world.
The assumption is that the dollar will provide a "safe" place for forex traders and investors to preserve their capital. It's this safe haven status that is providing strength not seen in the U.S. dollar for years.
President Barack Obama's address to Congress yesterday, though stirring and somewhat inspirational, did little to actually inspire the markets. As a result, risk appetite is shrinking again, and the U.S. dollar is finding strength as traders pursue a flight to safety.
The interesting conclusion of all of this is yet to come. What happens if the economic stimulus works and the U.S. dollar is no longer needed as a safe haven? And what happens when traders start looking at U.S. economic fundamentals and see trillions upon trillions of dollars in debt? Dollar strength may be the immediate effects, but dollar weakness may be the long-term end game.
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