No QE3 Right - So Why Did The USD Just Hit A New Cyclical Low? Citi Explains Why

Tyler Durden's picture

If you are confused why at one point every word the Chairman said was the equivalent of one pip lower for the DXY and 10 cents higher for gold, wonder no more. Here is Citi's Steven Englander asking, and explaining why the USD just hit a new cyclical low.

From Citi's Steven Englander

Asset markets pretty much liked the FOMC statement and really liked the press conference, but that's not the same thing as liking the USD. Consider the chart below -- the blue line shows the tick-by-tick drop in DXY (the dollar index) from noon to  4PM New York time, encompassing the FOMC statement and the press conference. The red line is the S&P and the green line is the two year yield. The question is what surprised the market  to such a degree that the USD basically hit new cyclical lows.
The factors:
1) the Fed comfort zone with how core inflation is evolving -- investors may have been looking for an upgrading of the degree of inflation concern that did not emerge either in the statement or in the press conference comments -- neither emerged
2) the dismissal of USD weakness as a factor driving commodity prices -- echoing a speech by Fed Vice-Chairman Yellen a few weeks ago; rapid growth in EM economies was viewed as the major factor in commodity price strength
3) the comments on a strong dollar policy were treated pretty much as pro forma relative to the view that a stronger US economy is a prerequisite to a stronger USD in the medium -- a view that embraces USD weakness in the near-term -- "The second thing we are trying to accomplish is get a stronger recovery and achieve maximum employment. Again, a strong economy attracting foreign capital will be good for the dollar."
4) reference to the success of QE2 -- in particular to the gains in stock and credit prices as the measure of the success of QE2 -- by implication a weaker USD is an unindicted co-conspirator in that success
5) the emphasis on the measure of Fed ease being the stock of assets owned rather than the flow
-- by implication the end of QE2 would be the end of additional easing but not the beginning of tightening -- the implication for the FX market is that a backing up of asset prices at the end of QE2 would be unwelcome.
6) given the success claimed for QE2, the conclusion "we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy" seems very tepid.
It is not clear how much of these comments should have been viewed as a surprise and certainly whether they merit taking the EUR and AUD among other currencies to new cyclical highs. At a minimum they reinforced the view that any shift in policy was happening slowly and is still heavily contingent on economic outcomes. From the perspective of markets there is little to discourage flows into EM and the ongoing reserves diversification needs that have steadily weakened USD with G10 as well as versus EM..
The USD moves reinforce a story that is well known and widely priced in. It is clearly the path of least resistance at the moment, but also is increasingly contingent on ongoing global growth and asset market strength. The Fed did nothing to discourage that thinking, but at a certain point the distinction between USD weakness and asset market strength may become more clear than it is now.

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lolmao500's picture

Because nobody in their right mind trust Bernanke or congress to do the right thing.


BTW... what's the technical support of the US dollar MUST NOT BREAK? Isn't it around mid-71?

And if you think gold has shot up... just wait till tomorrow after the next bond sale, the US will break the debt ceiling!

Cassandra Syndrome's picture

Just above 71, record low set in July 2008. 2 months before the Sixth Sense death moment for the Global Financial System, it still hasn't sussed itself out as a ghost yet.

alien-IQ's picture

actually it was 70.69 in March 2008...but that's just's toast.

alien-IQ's picture

yes the all time low for the USD is just below 71...but that's irrelevant at this point since it is pretty much a given that the $DXY will be below 70 before June. The USD has NO support.

Yancey Ward's picture

But the Treasury Secretary just reaffirmed the strong dollar policy!  Surely Little Turbo Tax Timmy isn't a lying scumbag.

traderjoe's picture

Or a tax cheat...

All this talk of the DXY...comparing toilet paper to toilet paper as they all swirl down the loo...

narnia's picture

the DXY is 57% weighted towards the Euro.  one of its only items of support is the potential implosion or disintegration of that piece of toilet paper.

the $ reached an all time low against the AUD (#1 in Soverign Fiscal Responsibility Index) & near all time lows against the NSD (#2), sliver & gold. 

Arkadaba's picture

It wasn't that long ago that 1 US dollar = .62 Canadian. Now one US dollar = 1.05 Canadian. Very bullish for cross border shopping. 

robertocarlos's picture

I know what you mean but you explained it backwards. 1 CDN dollar  was equal to 62 US cents. Today 1 CDN dollar = 1.05 US dollars

RafterManFMJ's picture

Yeah I remember getting lap dances for around 10 dollars US just 5 years ago... ah, Sundowners it's been too long.

Terminus C's picture

Other way around, but yea.

1 CAD bought .62 USD in 2000

now 1 CAD buys 1.05 USD

Arkadaba's picture

Thanks for the clarification. It has been a long day and I don't trade forex though I'm intrigued. 

Luckily, in terms of selling my labour, I've been on the right side of the trade. And having lived on both sides of the border, my celsius = fahrenheit ratio is totally screwed up too!

Law97's picture

 took a vacation to BC last summer and felt like I was damned poor.  Prices were 50% more expensive in Canadian dollars, just like it always had been, but this time the exchange rate made it so that everything was 50% more expensive in REAL terms.  $10 dollar happy meals, $120 cheap motel rooms, $8 pints, $4 ice cream cones.  I felt downright poor compared to the Canadians.  Here I am, a well-paid professional in the U.S. and I felt like I couldn't keep up with even the working classes I saw around me in Canada who were spending freely.  What a reversal. 


I travel quite a bit internationally and have for the last 20 years or more.  Americans always used enjoy very inexpensive prices pretty much anywhere they went.  Now it's the opposite.  When we travel we are being crushed by $15 hanburgers and $10 beers.  Even Mexico is no longer a bargain.  Our purchasing power destruction is obvious to anyone who travels internationally.  It's been a real eye opener just how far we've fallen in the last 5-10 years.

SoNH80's picture

I remember the good old days, summer '01, travelling in Germany, when the DM was artificially cheap v. the dollar... $20 hotel rooms, $4 dinners, $1.75 liters of beer-- and this was in places like Munich and Berlin.  Augsburg, the greatest small city in Northern Europe, was even cheaper. 

Id fight Gandhi's picture

Makes the drop in home prices all that worse

ebworthen's picture

Cue next European sovereign debt crisis to pop the dollar for a couple of weeks and let the HFT FX trade machines make some money.

Then QE 3 (purchase of MBS's by FED) then let oil and food prices go up another 25% and say that "core inflation is still at 2%" as seniors get 0.2% for savings and start buying dog food.

Lather, rinse, repeat.

AchtungAffen's picture

Yeah, 70.74, the all time low.

dick cheneys ghost's picture

pass the sweet and sour shrimp................

Bicycle Repairman's picture

Were you making a reference to the "mail order school of diplomacy" skit from '75 SNL?

If so, amazingly obscure.

Fred Hayek's picture

Oh . .

I was just about to cause an international incident by shooting someone who'd said something anti-american

Arkadaba's picture

Like go Habs go! Game 7. I know it is bread and circuses but it is my one guilty pleasure.

Errr Edit: Not my only guilty pleasure but hey ...

falak pema's picture

The FED predicts a GDP growth of 3.5% in 2011. This is a number that boggles the mind. Any body like to comment it?

Secondly if the growth does not materialize and/or inflation spikes the FED keeps its options open to ease once again the MS to levitate assets again...Right?

Have I understood the gist?

Wow! Benocide thinks he can run the ship up the growth hill without inflation, without asset devaluation, without USD caving in completely. A maestro at work! So corporates don't pretend your margins are getting crushed by commodity hikes that don't exist. Oil hikes are of NO consequence on inflation! October revolution anyone?

lolmao500's picture

3.5% is only ``nominal`` growth... if you factor in the ``deficit spending`` of 10-12% of GDP + dollar devaluation, the real growth is -10%...

honestann's picture

Sure.  To make it much easier to understand, just consider the exact equivalent situation for your neighbor next door.

#1:  His income drops 20% from last year.

#2:  He borrows funds equal to 23.5% of income last year.

#3:  Therefore, his GDP (and spending) this year is +3.5%.

That's how they calculate things.  Notice how we must totally ingore the increase in your neighbor's debt to end up with GDP at +3.5%.  The fact is, his real GDP is -25% to -45% depending upon the interest rate he is paying to borrow that money.  In the case of the federal government, the interest rate is only "a few percent".

The point is, the GDP is falling like a rock.  All these mind games are to attempt to hide the fact that the USSA has been in depression for several years now.  The fact is, the USSA is in deep, deep shit, and sinking fast.  The whole game of the federal reserve, federal government, banksters international and mainstream media is to fake gringos into a false sense of security and hope until they are completely sunk in the bog of history.  Whether that already happened or not is a matter of opinion, I suppose.

JeffB's picture

The tragedy, however, is that the U.S. debt went up $1.7 trillion in 2010. That is 53% of total federal revenues for 2010 & 17% of GDP. Government spending, counting state & local was 48% of GDP.

Yeah, we're in a heap of trouble.


Urban Redneck's picture

The mind of the central banker is a scary place to visit-

Chronicle of currency collapses: re-examining the effects on output

The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes.

honestann's picture

The dollar is toast.

No, cancel that.  Toast is real.

FunkyMonkeyBoy's picture

The U.S. dollar went extinct in 1971. It can now be referred to correctly as one of the following:

Federal Reserve Note

Monopoly money

Jew Confetti

john39's picture

i get it man.  you get it.  I just can't understand why so few americans get it.  what people really don't get, none of this is really about money, that is just a means to an end.  lets just see how this all turns out. 

Chuck Walla's picture

Few Americans get it because:

!. In school, they were more concerned with getting condoms on cucumbers.

2. They all knew the welfare system would be there.

3. Finance and money is so boring unless one wants a quick 8 ball.

4. New season of Idol!

5. Hope & change is a hell of a lot eassier to vote for than do.

JeffB's picture

"lets just see how this all turns out."

I feel too much like a fly stuck in a web watching a spider approach to enjoy watching how things unfold.

Ratscam's picture

Wrong, not jew confetti, rather zionist confetti.

Big difference between Ashkhenazi and sephardi jews.


Holodomor2012's picture

If it walks like a duck.

Anyhow, nice work on your +9 Funky.  Someone told me it's a point for every Jew who junks you and 10 for every vitriolic sayanim who responds.

Richard640's picture

but what about Kirk Douglas's magnificent chin...?

barkingbill's picture

fine but you know not all jews like bernanke or the fed, or the status quo at the moment...lets not get all hitler over know how that ended

Holodomor2012's picture

No, actually no one knows how that ended because they get thrown in jail for talking about it. 


Id fight Gandhi's picture

They are doing a lot of damage to themselves but its not right to ruin USA economy for their own games.

buzzsaw99's picture

Joo, not Jew. One has little to do with the other.

Client 9's picture

Your comments are racist, ignorant and cruel. You must desist.

lolmao500's picture

You can eat a toast, but you can't eat toilet paper!

sabra1's picture

depends what's on the toilet paper!

rosiescenario's picture that Nutella??? uh, the aroma seems a bit off....

Au_Ag_CuPbCu's picture

I can eat toast....sandwiching my iPad...yummy!

Conchy Joe's picture

I like my toast golden brown - the gold you can eat.

tsx500's picture

that is a huge slap in the face for toast my friend !