Friday, December 2, 2011

What could cause US Dollar strength?

I've noticed that the dollar has been strong lately even as the stock market has gone up. Many traders still keep an eye on the dollar and see a strong dollar as a flight to quality, and thus weakness in the stock markets. This correlation may be beginning to change. Since Sept. the USD has been going up, and the stock market is up since Oct.
Today, the employment numbers came in relatively strong, and then we see strength in the USD. The talking heads on CNBC are trying to figure out why the dollar is strong even when the stock market is strong. In my opinion, if the economy is strong, then the dollar will stay strong. And furthermore, from a investing perspective a strong economy before the next elections will favor the Democratic president and the Democrats in general. If the Dems are able to take the reins again I can see govt. revenue increasing through taxes. Raising taxes will show the world that we intend to pay our bills, resulting in more confidence in our currency and more confidence in our bond markets. This holds down inflation, keeps imported goods including energy less expensive for us, and also keeps interest rates relatively low since the threat of a devaluing currency is removed as well as the threat of inflation. This is good for the economy in general, which is also good for our banks since they can expect their loans to be repaid. They will be more amenable to lending as a result.
This is looking out farther than I trade, but I get the feeling that this market and this economy is stronger than many believe.

Here are some charts to ponder:

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