During the last days of protests in Cairo's Tahrir square, the U.S. dollar gained strongly. Blame instability in the Middle East, said one major news source:
"The dollar rose against most of its major counterparts as Egyptian President Hosni Mubarak stepped down and handed power to the military, stoking demand for the safety of U.S. assets." (Feb. 11)
Well, the instability has only gotten worse: Since then, protesters have hit the streets of Yemen, Iran, Bahrain and Libya. So that should have really "stoked demand for the safety of U.S. assets"...
...Right?
Wrong. So far this week, the USD has gone sideways-to-weaker. And wouldn't you know it, a headline on another major news source now says:
"Gold hits month-high, dollar falls on Middle East" (Feb. 16)
Market explanations based on "fundamentals" are like soft putty: You can change the shape of the very same "reason" to make it fit both bullish and bearish market action.
Here's another recent example. Remember how in the fall season of 2010, rumors were flying that the Fed was about to announce the second round of its quantitative easing program (QE2) -- and how that would usher in the dollar's collapse?
Well, on November 4, 2010, the very day QE2 was formally announced, the USD turned stronger -- and stayed stronger. This chart of the U.S. Dollar Index, which measures the greenback's strength against the basket of its 6 major competitors, illustrates the post-QE2 rally:
Just like with today's "uncertainty in the Middle East," it's easy to make compelling arguments about why QE2 is both bullish and bearish for the U.S. dollar. On days when the dollar falls, say: "Of course it would! QE2 is inflationary." On days when the dollar rallies, say: "Of course it would! QE2 supports the U.S. economy."
Just watch the news. Soon enough, you'll see how often they use same "fundamental" reason to support opposing conclusions, depending on what markets are doing.
Elliott wave analysis allows you to gauge the most likely trend objectively, without having to rationalize market action with "fundamental" logic. Our intensive Currency Specialty Service gives you our latest forex market forecast right now.
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