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Foreign Exchange

USD: A tale of two markets?

As the US gets ready to switch on its money-printing presses – a reader kindly sent me a picture of the new dollar bills that are about to go into circulation – the FX market, like others, has been caught between those who think the end of the crisis is nigh, and those who think the end of the world as we know it is nigh.

Many predicted, rightly for now, that the dollar had to fall as a result of the proposal of yet another huge bailout in the US. It seems, apparently, that risk aversion has, to quote one analyst, “slightly dissipated.” So, there’s been a fair amount of piling back into the carry trade – a fact that seems at odds with the fact that the world’s equity and bond markets are far from calm. Furthermore, short-term FX implied volatility remains extremely high. These contradictions could be analysed to the nth degree, but from where I sit it’s obvious that nobody’s really got a clue.

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