The dollar has quietly been strengthening since it bottomed out in September. The WSJ Dollar Index has risen almost 8%. So far, exports have held up with the added benefit of cheaper import prices tamping down inflationary pressures. Perhaps this is why the Fed has remained quiet about Japan’s attempts to devalue the yen.
Not everyone is happy about the Bank of Japan’s monetary policy. South Korea recently lowered its own interest rate, and the Japanese seem likely to encounter resistance to the policy at this weekend’s G-7 meeting. Now that the yen has broken through the magical 100 barrier, it looks ready to run.
The last three times that margin debt has outgrown the S&P500, it signaled a correction. With the world central banks simultaneously easing, it’s anyone’s guess what will happen next.
The Fed will not decrease bond purchases. If anything, the organization is laying the groundwork to increase purchases to $100bn per month. Look for a Hilsenrath article laying out the case soon. It will note that inflation remains low and the job market remains weak, so the Fed has more room to act.
And if you seriously believe that the Fed will end this program, then examine the chart above and see what happens when the Fed ceases bond purchases.
I don’t know what the problem is here. Inflation remains low in both countries, and unemployment continues to decrease despite the strengthening currency. Aussies, Kiwis: just be thankful you’re not in the eurozone.