The neuro-behavioral science trading edge
Why the USD is the trade of 2016 & 17
- Vijay L Bhambwani Jan 26, 2016

The above piece on Bloomberg states Ben Bernanke's view on the US$ which he says is "peaking out" against the 16 global currency pairs. I would concur with this view but for different reasons -

For decades, USA has imported goods & services from other Countries but hasn't paid entirely in cash (Dollars). Their trade is settled by combination of cash, sovereign bonds & sale of arms & ammunition along with other goods & services. The recent turmoil in the Middle East has highlighted the fact the the Fed has never disclosed how much treasury paper has been held by which country for exporting to USA. Here's my argument. If the interest rates in the USA have been near zero, why should a trade partner of the USA accept bonds instead of cash? They get practically no interest for locking their monies for 10 years almost interest free !! The answer has been in the stage management of the USD. It has been deliberately strengthened so the investors in US bonds get capital appreciation instead of interest yield on their bonds held, by currency appreciation alone. It's like this- you buy USA bonds when $ is 62 and when you exit, $ is 68 so you get 6$ appreciation even if interest is zero. So far, so good.

Trade partners of the USA (especially oil exporters) are in a cash crunch soup & are pulling out money from USA treasury holdings. The Fed won't tell us just how much. If enough people demand their money back, the US $ weakens from the outflows. Once the $ starts weakening, capital appreciation reverses and leads to withdrawal by those depositors who don't even need the money. The US $ strength will start to unravel. My guess is Bernanke knows it but hasn't said it in so many words in this article. But as a business owner, wouldn't you think so?

I would watch the US presidential elections in November 2016 rather keenly from this view point.

Vijay L Bhambwani