No doubt, economically and financially spoken, 2010 will be a bumpy year but nevertheless, I think it could easily become the year of the dollar.
Interestingly, on Sunday, Jan. 3, Mr. Bernanke, in his speech at the American Economic Association's annual meeting in Atlanta, said: “having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated."
The Fed chief said, "all efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs."
Bernanke added, "However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks — proceeding cautiously and always keeping in mind the inherent difficulties of that approach."
He added, "Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward.”
Remember, as recently as in November, Mr. Bernanke also said: "never say never" when asked whether the Fed should instead use higher interest rates to pre-emptively prick future bubbles and when he later also said he wouldn't rule it out.
At that same meeting in Atlanta, Federal Reserve Vice Chairman Donald Kohn said the central bank has “no shortage” of tools for pulling back record levels of monetary stimulus, from raising the interest rate it pays on reserves to selling assets: “The appropriate use and sequencing of these tools is under active discussion by the FOMC … We will be able to unwind our actions when and as appropriate.”
Yes, investors should not overlook the Fed’s chairman and vice-chairman statements of using its monetary policy tools, if necessary, more than the economic and especially employment data would suggest under normal circumstances.
In my opinion, we will see U.S. interest rates move up and that will allow the dollar having a positive 2010, and certainly beyond that what most investors are expecting for now.
In this context, on the markets, I’d like to say we’ve already seen a breakout for the 10-year U.S. Treasury yield.
The 10-Year Treasury yield has broken the upward channel resistance, hereby signaling a continuation of a prior advance.
In 2009, we saw the 10-year Treasury yield surging to 4% and then correcting in the second half of 2009.
The channel breakout is bullish for long-term yields, but, be careful, it’s bearish for long-term bonds.
Remember, rates move opposite of bonds. Higher Treasury yields are a positive for the dollar.
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