No asset class has suffered more from QE2’s massive expansion of the monetary base than the US dollar. Ben Bernanke’s decision to freeze the Federal funds rate at near zero, while the rest of the world has ratcheted up rates, has proved a death knell for the greenback. It would be a vast understatement to say that this has become a one sided trade, with positions in the futures markets betting against Uncle Buck at record highs. This has become every trader’s free lunch.

We all know how this story ends. When too many traders pile into one end of the boat, it capsizes. Think of stretching a rubber band to its limit and waiting for the snap back. The next chapter in this story has to read that the rest of the world pauses with their rate rises, while the US plays catch up, possibly later in the year. The first round of profit taking in the “RISK ON” assets of stocks, commodities, oil, precious metals, and foreign currencies is certain to trigger a flight to safety bid for the dollar. Then those huge, hot speculative positions in the dollar come tumbling down.

Most over extended on the upside has been the Euro, which seems to want to go higher as its fundamentals worsen. The move from $1.28 to $1.46 has been accomplished with a mere 0.25% rise in interest rates, and some impressive jaw boning by European Central Bank president Jean-Claude Trichet. Never mind that the PIIGS are at or near bankruptcy, most European banks have a negative net worth when their cross holdings of sovereign debt are marked to market, and that Europe’s economy is growing at half America’s rate, and a tenth of China’s.

..“In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be.  The thing to do is to watch the market, read the tape to determine the limits of the get nowhere prices, and make up your mind that you will not take an interest until the prices break through the limit in either direction.”..

Jesse Livermore


.."Capitalism works better than it sounds, while socialism sounds better than it works"...


Richard Nixon

.."Just because you do not take an interest in politics doesn't mean politics won't take an interest in you"..


Pericles

.."I never found beauty in the longing for the impossible and never found the possible to be beyond my reach"...


Ayn Rand

.."The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what's going to happen contradicts my way of looking at the market."..

George Soros