May

16

These numbers have not been tested yet but recent moves in break even inflation expectations as measured by TIPS and nominals, industrial and commodity metals like gold and copper, and inflation as measured by the Bureau of Labor statistics turning lower (and likely to continue to do so given a host of things including rents, etc.) may portend the turn in the U.S. dollar to higher levels particularly versus the European currency pairs. There is a host of other factors that seemingly should support this that would make capital flow to the U.S. versus Europe.


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  1. Mulholland Drive Street Racer on May 16, 2007 4:42 pm

    10 year TIP spread went out today at about 2.33. about three weeks ago this spread was at about 2.44 having moved up from 2.36-2.38. so, in the past year this spread was at like 2.80ish and came in to about this mid 2.30s area. during that time the dollar weakened against the Euro, Swiss and cable.

  2. Caravaggio on May 16, 2007 7:58 pm

    Hi John, It looks like the UK may likewise be ‘working through’ its peak in inflation, which brings us to the question of the importance of absolute inflation rates and inflation differentials in determining exchange rates. In most cases, lower inflation would be positive for bonds and equities, and thus one may expect the USD to appreciate on the back of increased capital flows from abroad. Experience however, tells us that the USD will have a positive correlation to inflation indicators in the short-term, with expectations of lower interest rates having a negative impact on the USD (I guess this makes sense from the perspective of the currency as a standalone asset, which is how most currency traders trade it). Thus, timing becomes critical.

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