Things are getting worse for the US dollar and the smart money is betting on a big fall.
The Financial Times reports that hedge funds and foreign exchange dealers are "shorting" the currency. The value of bets against the dollar on the Chicago Mercantile Exchange rose $11.5 billion in the week to March 1 to $39 billion. That's $3 billion more than the previous record of $36 billion in 2007 when the US market started to implode. Instead, everyone is betting on the Euro with expectations that the European Central Bank will raise interest rates.
So why is this happening? Part of it is because of the upheaval in the Middle East, part of it is because of the state of the US economy. Soaring oil prices, driven by upheaval in the Middle East, falling equities and elevated volatility have made investors uneasy. Now, a flight to the dollar usually accompanies increased risk aversion but in this case, the Fed is sitting on its hands. The dollar is also suffering because of the Fed's lack of credibility on inflation, given the risks of a continued rise in oil prices. The Fed is not doing anything about it.
Slack monetary policy in the US, combined with a bad economy, will continue to drive the dollar down further.
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