Central banks are easing again, fostering a “risk on” move even though the global economy is lurching lower. This risk rally comes with contradictions for the USD, because the upswing in financial assets is USD bearish while the worsening economy is USD bullish. But the breakdown between asset markets and economic signals needs to be resolved. Either financial assets adjust to reflect decaying economies, or economic conditions rise in response to the new stimulus.
At present, it feels as though asset prices are being driven by the buying power of QE rather than any confidence that the stimulus will revive the economy.
Yet this USD resilience may not last, especially as the EUR has pulled backed from the abyss. The focus may shift to the US, where the election season and weak economic growth will bring the fiscal cliff into focus. The current rules we have in place on how FX markets operate will need to be revised as the value, not just the function, of the USD will matter once again.
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Global Research