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No “interest” in currencies

November 9, 2013

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This past week, ECB governor Mario Draghi lowered the Euro area short-term interest rate to 0.25%, effectively joining the rest of the western world’s monetary masters in removing the reward to hold currency. As a result, we find very stable foreign exchange markets that allow multinational corporations to diminish the cost of currency hedging(insurance). In a way, this coordinated global policy of harmonizing the fx market should provide a stimulus to employers as costs are reduced and certainty regarding future business prospects is added. While I am personally biased as a currency trader who prefers moving markets over controlled ones, I remain doubtful that the long-term implications of overriding free market flow will be net positive to society at large.

Dollar Index

Today, I wanted to share this outstanding 30 year US Dollar Index chart. Please note that the Index is entirely focused on the pre-globalization era western economic power distribution. As such, important currencies such as the Chinese Yuan, Russian Ruble, Indian Rupee, Brazilian Real, South African Rand… are largely ignored and would make the dollar decline much sharper on the chart if included.

DXVeryLongTerm0913

As all interest rates are next to zero and QE has become a global phenomenon, the US Dollar’s descent has stabilized with respect to other currencies. However, the long-term trend is a market participant’s friend and it is clearly pointing down. Keep that in mind in case you decide to deploy investment money in one currency only.

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