The Dollar Bulls Seem To Have All Abandoned Ship...

First trading day of the new 2006 calendar year and already the first trade the FX masters of the universe are doing is dumping the old greenback against almost anything that moves. How quickly times change... Six weeks ago, one couldn't pick up a decent newspaper without stumbling upon an article about just how great the U.S. currency looked. I am no FX guru, but I was right about being sceptical about the overly bullish dollar sentiment. My 1.21 euro/$ target by February of 2006 is not that far away.

The Fed minutes today indicated that the tightening cycle is drawing to an end. Consequently, the market tested the 1,245 SPX support level briefly and then proceeded to rally on the expectation that the Fed will finally loosen the reins so to speak. Gold investors seem to be betting that we are still far below "neutral rate" though -- or why else would gold be hitting new highs if there was indeed "no inflation" and the other asset classes offered "good value". Something is amiss here and I've been trying to put my finger on it for a long time without much success I am afraid. I do however feel that the U.S. economy is setting itself up for a massive disappointment this year. The brief yield curve inversion (10s yield dipping below 2s yield in late December'05) is but just a harbinger of the troubles ahead. Watch the house market -- the mother of all bubbles, even bigger than the one which brought the tech market to its knees in the late 90s. This is what ultimately may bring down the "invincible" U.S. consumer -- the engine behind the growth in the U.S. economy.