Wednesday, March 24, 2010

A Look at the U.S. Dollar and Treasury Rates

Note today's upside break in the U.S. dollar (UUP; top chart) and in 10-year Treasury rates ($TNX; bottom chart).

During the market decline of 2008 and 2009, we generally saw a rising dollar accompany falling stocks and falling interest rates (rising Treasury note prices). The dollar and Treasury debt acted as relative safe havens during the rout of stocks.

Now, however, we have been seeing a stronger dollar since late 2009 along with stronger stocks. Treasury rates have also been on the rise since that time.

Rising rates do not seem to be signaling inflation, as long as we have a firm U.S. dollar. Indeed, commodity prices have stayed relatively tame and were down sharply today. Rather, buying of Treasuries from abroad may be slowing down and traders may be betting that the Fed will tighten credit conditions before inflation becomes a problem.


Daniel said...

1) Fear of Deflation.

2) Just right. Nice warm porridge, not too cold, not too hot.

3) Fear of Inflation.

..If we're reading you right, Dr. Brett, it sounds like the economy has been very slowly moving from the first state, into the second state.. and we're still well away from the third state.

I believe your early flagging of the emerging strength in the Industrial sector, a while back, in your excellent weekly indicator review, was an echo of this "economic strengthening" is still GOOD phase of the cycle.

Rates are merely normalizing, from artifically depressed levels.

Will it be the first really good employment numbers that shift the balance..?

..and then, thereafter, news of economic strength will start to become detrimental... because of fears of Fed vigilance?

That is conjecture, but the just-right porridge nature of things is clearly being manifested by the slow, bubbling, churning meltup of the market the past 18-20 days. It is portending good headlines, 2--5 months ahead.

And yes, although commodities were down sharply today, as mentioned in your post, the more 'industrial' type materials, such as steel and chemicals, showed a positive divergence and relative strength. They are not running as a pack with commodities as much as previously...


bruce said...

the dollar is a relative measure.

people think the euro is going to heck.

we can still have inflation and higher bond rates if the euro people are trashing their country even worse.

i think that's exactly what's happening, too.