Tuesday, December 22, 2009

Other Currencies Are Sold, Not US Dollar Being Bought

Or so it seems to me. U.S. dollar has had a sharp reversal upward ever since Dubai announced the debt freeze very conveniently on Thanksgiving Day when the financial markets in the U.S. were closed.

Convenient in two ways: one, the U.S. dollar index (DXY) was just starting to bust the tenuous support around 75 to go down lower when Dubai announced its intention; it was also convenient for the commercial players in the U.S. dollar futures market, who had been net long U.S. dollar since this summer.

The sharp rise is attributed to the usual stuff: flight to safety and liquidity of U.S. dollar and dollar-denominated securities. I don't quite understand why the currency of a country whose government continues reckless spending is safe, but that's what's been said.

But is it the strength of the dollar, or the weakness of other currencies, particularly Euro and British Pound? And while the dollar has been ramping up with no fundamentals underneath it (as I can see), why aren't other U.S. dollar-denominated securities like Treasuries, agency bonds, MBS getting the bid?

When I created this chart below and took a look at it, I came to a conclusion (for now) that it is the weakness of other currencies. Why? Because it is only the U.S. dollar currency that has been bid up since Thanksgiving Day. Short-term Treasuries are flat, no bid for agency bonds and MBS, and long-term Treasuries are being sold and yields are rising. The lines represent different ETFs as proxy for underlying currencies and bonds.

UUP: US dollar ETF
FXB: British Pound ETF
FXY: Japanese Yen ETF
SHY: 1-3 year Treasury ETF
TLT: 20+year Treasury ETF
AGZ: Agency bond ETF

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