The more I think about it, yes. Traders are selling dollars as fast as they can for fear that inflation will suddenly burst back into existence and drive the dollar back to its summer lows and beyond. That thinking is sort of like leaving a football game before the kickoff to beat the traffic. You make make great time but you miss the game.
In a world where deflation is a much more obvious risk than inflation, selling dollars seems precisely the wrong way to play until well into the second half of the game. In the short-term, deflation (or deflation-risks) make debt more valuable. It stands to reason, as a debtor nation, the US dollar should rise in a deflationary environment.See this piece for some helpful background.
If the economy rebounds rapidly and the Fed does not remove its extraordinary policy accommodation quickly enough, sell to your heart’s content. Inflation will be fierce, making summer 2008 look like childs play. Until then, I’d play it safe and buy some cheap out-of-the money dollar calls.
If long EUR/USD, there’s no hurry to get out; the trend is your friend. Leave a trailing stop however, because I get the sense that this uncharted territory will become clearer in the days and weeks ahead. Don’t sell EUR/USD outright against the trend. That can be expensive. My cardinal rule is to follow the techs when the charts and the fundamentals disagree. If my thesis is right, the charts will come into line soon enough.
