We think the Fed underestimates this linkage, in part by using the trade-weighted value of the dollar rather than the absolute value (the trade-weighted dollar mixes together changes in the dollar with changes in the value of foreign currencies).
The U.S., for years burdened with a multi-billion-dollar trade deficit, had no problem because of the power of the dollar.
The dollar may yet decline, but so far the major trade-weighted dollar indexes are about where they were before the financial crisis.
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This can be viewed as the dollar-carry trade, the risk trade, or a hedge against further dollar losses.
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Gold and the dollar trade in an inverse relationship 70% of the time.
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The bearish U.S. Dollar trade: Goes hand in hand with the inflation trade.
Interestingly, the trend can be explained entirely by valuation effects, with the trade-weighted dollar depreciating 4%% in that time frame.
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This is a weighted average of short-term interest rates, corporate-bond yields, share prices and the trade-weighted dollar, with the weights derived from the Fed's model.
Neither president got everything right, but in moving in the right direction on taxes, regulation, trade and the dollar, both presided over booming stock markets.
They also suggest taking profit on their short euro-US dollar trade. (Read Trade Wars: How Overheating Led To A Conflict Between Brazil And Argentina).
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The expectation of QE2 boosted stocks enough to break through the technically significant 11, 000 level on the Dow, fueled primarily by the weak dollar trade.
In the year to May, says Michael Rosenberg, chief currency strategist at Deutsche Bank, import prices to America, excluding oil, rose only 0.9%, even though the trade-weighted dollar fell by 6%.
America ought to keep trade open the dollar stable.
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So, with Trichet talking about inflation and more and more talk about the potential for a global slowdown, those in the short-dollar trade decided that it might be time to take some profits yesterday.
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In fact it seems analysts have accounted for these factors in their profit forecasts and much of the benefit from overseas exposure (resulting from a trade-weighted dollar down 8% from last year and faster economic growth outside the U.S.) have been largely accounted for in consensus expectations.
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Their governments have balanced their budgets and built up trade surpluses along with dollar reserves.
The renminbi rose in reaction to the news, of course, as did the trade-sensitive Aussie dollar.
Recent months have seen gold and the dollar index trade in tandem on the upside when investor anxiety is at higher levels.
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The euro, meanwhile, clocked up gains of almost 3% against the dollar to trade at its strongest level in more than 14 months.
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By lowering the fed funds rate this much below Europe, the U.K., China and most emerging markets, the Fed has re-established the dollar carry trade.
All of this economic destruction is creating a perilous global race to devalue currencies for trade purposes against the dollar (a weaker currency makes the price of exported goods more attractive).
The yuan's increased use beyond China's borders is a (still distant) threat to the dollar's central role in trade and international finance, but if the dollar were eventually shoved aside, it would make Americans poorer and raise the cost of their borrowing.
Because Asia's trade volumes are proportionately so high, weakness against the dollar gains them more in fresh trade than it loses them in rising debt-service costs.
The yen has since erased its gains to trade slightly lower against the dollar.
It was trading close to 90.8 yen against US dollar in Asian trade on Monday.
On a trade-weighted basis the dollar today is close to where it was before Lehman failed.
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It was trading close to 88.97 yen against the US dollar in Asian trade on Friday.
That leaves the company vulnerable to variations in the value of the dollar and other trade disruptions.
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The right believes in free markets: low tax rates, a stable (ideally gold convertible) dollar, free trade, mild regulation.
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