Forex after the August FED

Many were looking for some disappointing news from the Fed yesterday, and they delivered. The initial reaction was a dollar sell-off as the Fed offered a dour outlook for the US and global recovery. Not that there isn't a recovery, but it is certainly hard to find. I love governmental euphemisms. In spite of all the stimulus already launched into the world during this depression, inflation rates are not rising. And that was the primary goal. Why? Why would governments want inflation to rise? Isn't that a bad thing? Not in the twisted world of "government-speak". Rising inflation is generally viewed as an indicator that the economy is heating up. Jobs are being created, people are spending and borrowing, asset values are climbing. Of course, when inflation gets too hot, the Fed will attempt to stop it by raising interest rates. This stops borrowing, job creation, and asset price growth. How?

It stops borrowing because people and businesses find it expensive to do so. It stops job creation, because companies cannot borrow at lower rates to expand. No expanding, no hiring. It halts the growth of asset prices, because people can't pay more for an asset plus pay more in interest. It will be one or the other. And since interest rates are out of their control, when they are rising, asset values are falling. This stops, or at least slows, economic growth. So the Fed is looking for some rise in inflation to signal that the economy is lifting. But turning over every rock they can find, the can't find inflation. Nor is all the money given to banks being lent out. This would help inflation rise. But the banks are in worse trouble than most families, and they know it. With falling asset values, they are stuck with under, and non-performing, loans. As more and more homeowners decide they are better off to leave their current mortgages, and "stick it to the man", the banks are truly "stuck". And when businesses go belly up, they don't worry about repaying their loans either. All in all, the recovery is on shaky ground.

Thus, when traders gave further consideration to what is happening, a flight to the dollar became the real answer. Safety. Liquidity. These are what the USD have to offer. Could this become a full fledged double dip? Certainly. Does anybody want to talk about that? Nope. Will the dollar benefit if a double dip occurs? You bet. Stay tuned, and we'll see how all this plays out.

Happy trading,
Bill
www.fxtradingmasters.com