Macro Wrap – U.S. Dollar in Time of QE

by Enis March 4, 2013 7:51 am • Commentary

The U.S. dollar has spent the last month in very strong rally mode.  It’s not just a rally vs. the Euro or the Yen.  It’s not just a rally vs. developed market currencies.  It’s a rally vs. practically every other currency in the world.

Most surprising to many market watchers is that the dollar has been undergoing such a rally in the face of QE-Unlimited.  In reality though, the dollar had been stable for the past 4 months, not dropping much despite the new QE program.  Now that problems are resurfacing in other regions, the dollar’s appeal as a safe haven is driving it higher.

Here’s the 5 year weekly chart of the DXY dollar index:

5 year weekly chart of DXY, Courtesy of Bloomberg
5 year weekly chart of DXY, Courtesy of Bloomberg


The dollar is trading above both its 50 week and 200 week moving average, despite the fact that the Fed has been engaging in QE for most of the past 5 years.  Clearly, QE is not a policy that on its own results in a currency’s demise, no matter the appeal of simple arguments (one look at the Japanese yen’s strength over the past 10 years despite multiple QE’s should be enough to settle that).

Looking at the 20 year chart of the dollar though, the recent rally no longer seems so strong:

20 year monthly chart of DXY, Courtesy of Bloomberg
20 year monthly chart of DXY, Courtesy of Bloomberg


The dollar index is still 10% below its 200 month moving average, and at the lower end of where it has traded over the last 20 years.

Looking at the dollar on a purely technical basis, it looks close to starting a longer-term, multi-year rally after years of forming a base after a 5 year downtrend from 2002 to 2007.  QE or not, the long-term prospects for the ol’ greenback look favorable.

Markets overnight:

  • Main story overnight was the price action in Chinese property stocks, which were hit by more curbs from the Chinese government and the 60 Minutes piece on CBS.  The Shanghai Composite closed down 3.5%, and the Hang Seng was down 1.5% (and now down 0.5% in 2013)
  • Japan was higher, and the rest of Asian equities followed China lower.
  • Europe traded in the red for most of the session until a recent rally, now close to unchanged.  Banks are the worst performing sector again.
  • SPX futures down 0.15% after being 0.6% lower at one point overnight.  The dollar, Treasuries, and commodities close to flat.