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Flash: The Dollar – very slowly preparing for lift off... - Societe Generale

FXstreet.com (Barcelona) - Societe Generale strategists believe that the USD is slowly preparing for lift off.

They begin by noting that the real yield on10yr TIPS has fallen from 3 ½% to well under zero in a decade and the US is running a sizeable current account deficit, playing fast and loose with its credit rating and avoiding excessive fiscal austerity. Meanwhile, they see that the Fed is re-writing the monetary policy rule book as it grows its balance sheet and leaves everyone else to debate whether this counts as ‘QE’ or not. They write, “There should be no doubt in anyone’s mind that the US authorities would be happy to see the dollar continue to weaken.”

However, these have all been good reasons to be bearish on the dollar for a long time, but all good things must come to an end. They feel that the US is in the process of ‘winning’ the ‘currency wars’. The economy is re-balancing back towards manufacturing. The trade deficit is falling and will fall a lot faster once the US reaches energy independence. And of the G3 economies, the US has by far the best prospects on a 3-10 year view. Further, they note that the Fed remains in super-accommodative mode, but once growth is back above trend (in H213) and the unemployment rate is falling, markets’ attention will switch to when they start to unwind policy accommodation and when they start to raise rates. They finish by writing, “A huge dollar surge of the kind we saw when Paul Volcker revolutionised Fed policy won’t happen, but a decade-long decline will end and be partly reversed.”

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