May 2, 2011

(Almost) Time to Buy the Dollar: Searching for Alpha for May 2011

Talk is cheap—especially when one is dishing on the economy.  Take Treasury Secretary Tim Geithner, for example.  His recent insistence that the U.S. believes that a strong dollar is in the best interests of the country was met with a collective yawn by currency dealers, who actually bid the greenback lower on the news. 

Similarly, the announcement by several Eurocrats insisting that a Greek default is not on the table was met with significant selling pressure on that country’s debt.

There may be a surprise reversal for the greenback if the Fed plays its cards right.  With QE II ending in June, and no QE III in sight, any plan for reducing the deficit would likely be a turning point for a higher dollar.

Let’s be clear.  Although QE is ending, it really isn’t—I’m sure that the government will continue its off-balance sheet support of the economy in some form.  And when I say “any plan,” I imagine that even the most ill-conceived scheme could result in a surprise rally in the dollar.

The massive popularity of the short dollar trade will only add fuel to the fire. Once the greenback gets a bid, the many hedge fund and mutual fund managers who hold the position will have no choice but to flee.

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