Two Themes Ruled the Greenback in 2010

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Debt woes spark dollar rally

The Fed’s upbeat outlook on the economy gave the dollar a boost at the beginning of the year after losing more than 25% of its value in 2009. During this time, positive economic reports coupled with Greece’s debt problems highlighted the dollar’s return as a safe haven currency. In fact, the debt crisis scared investors so much that even when the Fed started to express its concerns about weak employment, the Dollar Index was still able to push its way back up to 88.77 before topping out.

Greenback drops as the Fed considers more stimulus

Come June, the dollar’s rally lost steam as the focus on Europe’s debt began to wane, along with new austerity measures in the works. Weak U.S. data, especially in the labor market, attracted unwanted attention from Dollar sellers as well. The Fed then began to talk about providing the economy with further stimulus in order to spur growth.

QE2 vs. QE Lite debate

As disappointing economic reports stacked up in the U.S., most notably on employment and inflation, it didn’t take long for Quantitative Easing Part II to dominate headlines. In September, the dollar sold off across the board, making it almost impossible to believe that it was only a few months back when the Fed had been so optimistic on the economy. It then became clear that the central bank was going to pull the trigger on QE2. The only question left unanswered was, how big will it be?

Debt problems make a comeback and trigger risk aversion

By the time Federal Reserve Chairman Ben Bernanke officially announced the 600 billion USD stimulus package, it seemed like QE2 had already been fully priced in. The dollar began to regain its spot in the safe haven clique as the economy started to print positive data and Europe’s debt woes returned.

Will the 2011 major market themes continue to be this simple?

I hope so, but as we all know, nothing ever stays the same in the markets. Economic data is starting to get a bit rosier, austerity measures are taking place, and it looked as if consumers weren’t afraid to spend some cash this holiday season. All this optimism could be bad for the Greenback in 2011, but I wouldn’t bet the farm on it with Euro debt issues and emerging market inflation and growth rising faster than Justin Bieber’s ride to stardom. As always, stay flexible in your fundamental bias because as we’ve seen in the past, market sentiment can change in a snap!

That’s it my friends! It’s time to go ring in the new year! We’ll see ya on the flipside of 2011, and until then have a great weekend!!!