Strong Support to Greenback’s Rally

The US dollar got an extra boost to start the month yesterday when the Chinese authorities fixed the renminbi at its weakest level versus the greenback since this spring, and the "trading range" for the day was larger than the range for the past 4-5 months. The timing of the move was significant considering that Paulson is meeting with his Chinese counterparts at the fifth round of the US-China Strategic Economic Dialog talks on Thursday and Friday. There is intense speculation that the Chinese may want the renminbi to weaken to support growth. Any decided effort by the Chinese to keep their currency weak would certainly support the greenback's rally. The currency has been effectively pegged to the USD for months, so the Chinese have seen their currency gain sharply on most other currencies around the world. This is a key story to watch this week.

Paulson and Bernanke are making it clear that they will do everything in their power to keep yields on the long end of the yield curve as low as possible in an effort to shore up the US housing market. Bernanke was out directly talking up the idea of debt monetization. So far, these scary plans to buy money with money straight from the printing presses is being taken in stride and long yields continue to fall precipitously (macro players are also getting flushed out of the formerly popular bets on the yield curve steepening - the 2-10 spread has collapsed from a near record 260+ bps in mid-November to 180 bps at present.) Are we on the way to deflation or hyperinflation or both...? It's tough to say, but the Fed has lost control of credit markets by having to resort to these desperate measures. Lenders in the real market for loans are paying record wide spreads to benchmarks if they can get any credit at all, and consumers are also feeling the pinch on their credit cards, where credit limits are being slashed and interest rates jacked up to ridiculous levels - often 30% or more. So despite effectively zero interest rates, quantitative easing, and now signs of debt monetization, the average lender is experiencing a steadily tightening noose on their credit.