Archived IMT (2010.08.12)

HOW WILL USD FARE DURING DEFLATION? It depends on what is the reason to deflation and whether it is accompanied by substantial deleveraging in the markets as was the case in 2008-9. The last time we had GROWTH-DRIVEN deflationary fears (2002-3), the US dollar was under severe pressure. But that was mainly due to the fact that the Fed preceded most central banks in slashing rates. The 2008 decline in inflation was partly related to global growth but it was accompanied by aggressive market deleveraging, which did boost the US dollar. IN TODAY's EVNVMT, a persistent slowdown in G10 price growth would prove negative for the USD as markets anticipate reflationary policies that are led by the Fed. Only when the global economy (including China) descends in a true deflationary spiral, would the US currency benefit from the resulting decline in commodities. In this case, deteriorating plummet in global bond yields will prove positive for the Japanese yen. $EURUSD will need to clsoe teh week above 1.2770 to void prolonged damage below $1.2550.