Currency week in review: 03/22 - 03/27

After getting clobbered the week before, the USD climbed back last week. The market viewed this as either a) a sign that the US has bottomed out or b) that investors are piling back into the "safe haven" of the USD due to another bout of risk aversion. Both sound like BS answers (especially because their contradictory nature). Below is EUR/USD, USD/JPY and GBP/USD for last week.

Even ignoring the Euro's news drop on Friday afternoon, it's still interesting to note the price action. Out of all the popular theories out there, the closest one to reality would have to be the "best house in a bad neighborhood" idea for USD. With the GBP acting like the paper currency of a tinpot South American dictatorship, the EUR being hammered by Eastern Europe and the worst political regime of any major currency pair (the March 5th rate drop was so late and so underdone, markets didn't even react), and JPY getting squeezed by falling exports and worsening projected current account spreads that in contrast, the greenback looks like it should be in a hip hop music video.

Another note of interest is that despite all the big rhetoric and fear mongering on the news networks, the whole "reserve currency" thing blew right through. The market rightly dismissed it as a Chinese bluff and posturing ahead of the IMF meetings in late April.

Going forward, it's looking like a steady strengthening of the dollar on the back of the herd mentality, punctuated by sudden drops due to policy announcements. We are expecting the market to continue to be surprised when the Fed takes drastic and dramatic open market actions - as we have mentioned before, we don't think Big Ben is done yet and the market till now hasn't been pricing much of that price action in leading up to major news events/announcement. Next up, Bernanke's speech on Friday should be interesting.