EVERYONE expects that over time the Federal Reserve’s decision last Wednesday, November 3rd to buy long term U.S. Treasuries will drive money into the stock market and therefore drive it higher.  We’ll see.   The problem here is the word, “Everyone”. In the investment arena, those things which are the most obvious do not always pan-out as expected.

It was just last week on Thursday – the day after the Federal Reserve’s announcement that they would soon commence purchasing approx. $600 billion in long term bonds – that the U.S. dollar (greenback) did exactly what was expected.  It plunged south!  BUT that so far has been it… a one day event.  That’s a sign for us that not all is well.  Fortunes have unquestionably been lost by traders and speculators, who swung hard by buying the Euro, thinking that they were being given a straight, slow pitch.  So far the greenback has reversed sharply HIGHER and left wounded speculators in its wake.

The Federal Reserve wants U.S. Treasury bond yields to diminish and thereby strongly encourage near cash money on the sidelines and in bonds to move into areas that will stimulate the economy.  An immediate by-product of these low yields should be a weak U.S. dollar – which will strengthen American exports and increase the cost of imports for American consumers – which will improve American employment and trade imbalances.

The Federal Reserve’s “mandate” is strong employment and moderate inflation.  At this time in America, employment is very weak and inflation is lower than “moderate”.   With the Federal Reserve so clear on their mandate and purposefully taking action, the greenback should be heading further south, but it’s been moving quickly higher!  We believe that there are two primary reasons for this –

1. In Europe, there is strong uncertainty as to whether Ireland can handle it’s debt load.  Of course, Ireland is only the more recent focal point.  Portugal, Greece, and Spain have also been in the spotlight from time-to-time.  The cost of servicing the Irish debt has been soaring over the last week, which is putting further pressure on Ireland and causing weakness in the euro.  The greenback has been tearing higher as investors have been dumping the euro in favor of the U.S. dollar.

2. As much as everyone talks about not wanting “currency wars”, what we have are Asian and other developing nations who are very against the Federal Reserve’s idea to spend $600 billion and weaken the greenback.  Their economies have been built on a relatively strong U.S. dollar and the steady flow of dollars purchasing their exports.  We are not conspiracy theorists here at the Stock Market Companion, but you can bet that there has been some coordinated efforts by these nations to purchase the U.S. dollar in order to limit the immediate impact of the Fed’s decisions.

Time will tell which direction the U.S. dollar finally moves.  The first inning is over and the score is a stronger U.S. dollar – the opposite of what many were expecting.  Historically, no one has had the power to fight the Fed – but times may have changed a bit.

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