As the dollar continues its relentless climb, traders ask themselves why? Why is the dollar strengthening as the US enters what looks like a protracted recession, spends unprecedented amounts to bailout its banks, and its export engine sputters?
There are lots of fancy theories, but we prefer to keep it simple: The buck went into freefall in an inflationary environment as more and more dollars were pumped out of Middle Eastern oil fields and were shipped from low-wage factories in the Orient. As those trends recede, the dollar has strengthened dramatically.
Keep in mind, the weak dollar trend was extremely entrenched, as was the commodities boom. Dentists in Des Moines and plumbers in Pittsburgh were long BRL/JPY and up to their eyeballs in Chinese ETFs. When trends become pop culture, pop! goes the trend.
We are living through the hangover after the binge, and it may be quite some time before we party again.
