In an odd phenomenon, every time the dollar rebounds, a class of economic pundit called the deflationist seizes on this as proof that their theory of dollar strength through deflation has finally triumphed.
As we have allowed, both inflation and deflation are possible in a fiat currency regime as long as it is not tied to an external standard. That is a truism, but one which so many unfortunately overlook. Although we cannot predict the future, we can learn what to look for to assess the odds of each eventuality. As Walter Bagehot noted "Life is a school of probabilities."
Or as Charlie Chan, had he been an economist, might have noted, "Man who bases fundamental economic theory on short term market movement often ends up chasing the tails of probability."
A back-kiss up to the 80.40 level would be a normal chart bounce.
However we doubt that the dollar rally will attain that sort of altitude at least on this move. It has been a very sharp short-covering rally and the funds are nearly 'all-in.' The dollar fundamentals are getting increasingly dicey, and the overall markets instability is increasing. Most of the world knows that Hank Paulson has his finger on the trillion dollar bailout trigger, and monetization of bad debt is not exactly a classic currency building exercise. The US however, has been exceptionally fortunate by the support of its client states and central banks.
Let's see what happens next to clarify the picture.
