Dollar Rise!! Against all Logic!!

Stock market logic can be positioned to easily argue in favour of the trend. This is similar to how valuation logic can be twisted to justify stock prices. You can justify value with a dividend yield, future cash flows, or EVA. So for the currency and I am talking the dollar here. The argument for strong dollar has gone from deflation to higher interest rates. These are two opposing forces if you think about it. Now if imploding debt in the US was reason for the dollar to rise in 2008. Then consider that imploding debt in Europe. Should that mean a rising Euro or a falling Euro? No no no if Europe implodes the Euro will fall, but if US implodes the dollar will rise??? So figure out what you are thinking and what factors are at work. What happens when a financial crisis really hits. Take Demonitisation. What was the impact? Did the rupee fall or rise? it fell for a few weeks and rose for months to come. Reason? A crisis can cause money supply [read availability] to contract and then it does not weaken the currency. So the rupee was stronger during a period that interest rates came down, makes sense? So you cannot draw an equation unless you know exactly what will happen. In the case of a European debt crisis there maybe no time for Euros to leave. Write offs can happen overnight. Bank holidays and bail ins can be overnight. Suddenly you will not have access to funds to move them abroad. Check what happened in Cyprus. What transpires will depend a lot on government action and actual monetary measures at the time of a crisis. We cannot draw an equation of up and down based on just rates or inflation or a crisis. The dollar was rising for 8 years and the trend is reversing or so I think. Why and what will be the factors involved could vary from start to end. Pay attention to the changing factors and how the market is discounting actual news to understand the importance the market is giving to each of them.

Rohit Srivastava

blog: www.indiacharts.com