Donald Trump predicted dire consequences for the U.S. dollar if the Federal Reserve launched another round of quantitative easing, and now QE3 has arrived.
The U.S. won’t be able to pay down its debt if Fed Chairman Ben Bernanke “goes wild” with more stimulus, Trump told CNBC in July.
“The fact is that the country owes $16 trillion, and we just can’t keep doing this,” Trump said. “The dollar is going to go to hell.”
PowerShares DB US Dollar Index Bullish (UUP) has been moving lower since July on expectations the Fed would unleash QE3. [Dollar Weakens on Fed Speculation, Moody’s Warning]
UUP has fallen below its 200-day average decisively. It’s the first sustained break under the technical indicator in nearly a year.
The ETF tracks the dollar’s movement against a basket of currencies.
Recent strength in the stock market can partly be explained by the decline in the value of the U.S. dollar, says Sam Stovall, chief equity strategist at S&P Capital IQ.
The U.S. Dollar Index has a strong negative correlation with the S&P 500 of -0.69 over the past three years, according to Stovall. In other words, the dollar and U.S. stocks have tended to move in opposite directions in the aftermath of the financial crisis. A falling dollar has generally been good for stocks.
“The Fed’s third round of quantitative easing has opened the floodgates of liquidity, which, like a boater drifting too close to Niagara Falls, has swamped the dollar, at least for the time being,” the strategist wrote in a note Monday.
Technically, however, the dollar ETF may be due for a bounce after the sell-off. When the dollar was topping in July, bullish sentiment stood at an elevated 82%, according to Kimble Charting Solutions. The greenback’s recent decline has resulted in dollar bulls falling to the 32% level.
PowerShares DB US Dollar Index Bullish
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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