The U.S. dollar took a massive hit in stride following last week's announcement of a $6 trillion bailout package. The news caused the greenback as measured by the Dollar Index (DXY) to fall by just a few points from recent highs. The dollar's seemingly inexplicable strength is a harbinger of the catastrophic debt deflation I've been warning about for many years, since it will increase the real burden of debt on all who owe dollars.  It also shows how the dollar can be subject to short-covering pressure capable of pushing its value far above any logical threshold, even when the Fed is practically giving away dollars to the rest of the world.

Let me explain. At present, exceptionally strong demand for dollars is being driven in significant part by liquidity issues originating in Japanese financial markets. Like all central banks, the Bank of Japan has usurped a wide variety of debt paper in order to create a nearly unlimited supply of money to prop up the economy. One way it force-feeds yen into the system is by buying Japanese government bonds held by dealers. Dealers have been reluctant to sell lately, however, because they need the bonds to collateralize short-term borrowing in U.S. repo markets. They are more eager than ever to borrow dollars because the Fed has made them so cheap.

'Opportunity Moves to Size'

The Fed's intention in backstopping global markets with an effective $4 trillion credit line, in addition to a $2 trillion consumer stimulus, was to avoid a run on financial markets. Instead, the banksters may be about to discover that they have stimulated infinite demand for U.S. dollars. I once wrote about this in the context of my experience as a floor trader. One might think that if, say, IBM shares were trading in 50,000-share blocks, that a million-share offer from out-of-the-blue would overwhelm bids and depress the stock. In fact the opposite held true: As soon as the huge offer was "advertised" on trading screens around the world, arbitrageurs would figure out ways to make use of it, often by shorting call options or buying puts as hedges. Like piranha, they would nibble at the offer at first, until the smell of blood attracted enough feeders to pick the carcass clean in a frenzy.

Opportunity moves to size, as traders say. Unfortunately, the Fed may soon discover how this applies to the dollar now that they have stimulated effectively unlimited demand. 

Rick’s Picks trading ‘touts’ are for educational purposes only. Past performance is no guarantee of future performance. (See full disclaimer at https://www.rickackerman.com/)

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!


Latest Forex Analysis

Editors’ Picks

EUR/USD extends slump after NFP shows massive job loss

EUR/USD is trading below 1.08, down on the day. The Non-Farm Payrolls report has shown a loss of 701,000 jobs, worse than expected. The ISM Non-Manufacturing PMI surprised to the upside with 52.5 points. 

EUR/USD News

GBP/USD drops below 1.23 amid sour mood, after UK data

GBP/USD has dropped below 1.23 as the market mood sours. Final UK Services PMI dropped to 34.5 points, worse than expected.  

GBP/USD News

NFP Quick Analysis: 701K jobs lost only be tip of the iceberg, why King Dollar is ready for coronation

The US lost 701,000 jobs in March, the worst in 11 years. The Non-Farm Payrolls figures are lagging the fast-moving events. Wage growth is also skewed and should be ignored. The safe-haven dollar has room to rise. 

Read more

WTI trades in three-week’s highs near $26.50 a barrel

WTI is jumping from multi-year lows following the US President Trump’s tweet of yesterday (Thursday) suggesting a Saudi-Russian deal was on the pipeline.

Oil News

Gold remains confined in a range, moves little post-NFP

Gold extended its sideways consolidative price action around the $1615 region and had a rather muted reaction to the US monthly employment details

Gold News

Forex Majors

Cryptocurrencies

Signatures