Treasury Yields To Lead Dollar Lower?

Daily Forex Fundamentals | Written by TheLFB-Forex.com | Aug 17 08 09:13 GMT |

The U.S. Treasury department confirmed that the net purchase of Treasury notes by overseas investors (central banks and sovereign wealth funds included) jumped from $5.7b in May to $28.2b in June, an increase way above the norm. The increase in the amount of notes purchased at that time, added to the huge Treasury auctions of new debt in August, has created an imbalance in the Yield/Dollar story, that may just signal that recent dollar buying could soon be tested. Yields dropping will normally reflect that the expectancy for economic growth is also dropping, and positive economic sentiment is waning. That is also being shown in the drop in Fed Fund futures contracts reducing dramatically the expectancy of a Fed rate increase in 2008. The chances of a rate hike by year-end have gone from 60% reported in July to 25% reported in August. If the Fed is not going to raise rates the Treasury yields will drop further, and the value of the dollar may get pressurized. There is no tick-for-tick comparison to be made between yields and the dollar index, but they do run in correlation over time. When the Fed do re-set interest rates the mechanics are that they adjust the Treasury yields by increasing or decreasing the amounts of notes in circulation; it is referred to as Open Market Operations. Yields dropping have the same effect as lowering interest rates; rates are lowered to stimulate growth, and as such will now questions the ability of the dollar to hold onto new-found valuations. The markets are starting to reveal the answers as to why the dollar exploded in August, and are also giving the clues as to what will be required for the markets to hold these valuations. Treasury yields dropping will not help the dollar to easily make the next moves higher, it may not be the thing to stop the moves, but will weigh heavily on valuations. There is an imbalance at the moment that may have to correct itself before the next long-dollar moves can be made. Before and After The last thrity years Since 1973 the $100 note has gone from being worth $100 of buying power to $76 now (the value of the dollar index). With that steep of a drop there really should not be much of a trade balance deficit, if any at all, as U.S. exports have become progressively cheaper to sell abroad. The downside of a reducing dollar is seen when imports increase; a weak dollar increases import prices. A stronger dollar may not really be that benieficial after all to the U.S., the only ones that a stronger dollar really impacts are those Central Banks that hold a swath of their Reserves in dollar denominated assets, global oil producers who hold dollar based reserves and dollar based oil in the ground, and Sovereign Wealth Funds who are seeing the depreciating dollar ravage the value of their holdings. A 'strong dollar policy' is required to attract overseas investment; without it the U.S. economy would have to print more dollar bills to pay its way, and that devalues the notes already in circulation. From an overseas perspective it may be better to buy up a cheap dollar, rather than watch it devalue the Reserves already held. The dollar may have just got stronger out of need, rather than greed. The signs have been there that the buying was coming, and it has very quickly got to a stage that now questions are being asked about the ability to hold that rapid a move. If it does hold, and the greenback goes higher, the global Central banks will be the ones to thank as they step in to protect their 'long dollar policy' that shuts off the selling at 71.50 on the dollar index it seems. Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com TheLFB Risk Disclaimer can be found at http://www.thelfb-forex.com/content.aspx?id=174. The Copying, Broadcast, Republication or Redistribution of TheLFB Content is Expressly Prohibited Without the Prior Written Consent of LFB Services, LLC.