From the March 01, 2011 issue of Futures Magazine • Subscribe!

The U.S. dollar and the housing market

It is now over two years since the financial global collapse of 2008. The collapse was so great that it was calculated to be more than 11 standard deviations from the average value of the Bloomberg U.S. Financial Conditions Index. To put that into perspective, we need to remember that three standard deviations from an average usually captures 99% of price variation around an average. The deviation from normal because of the financial collapse was, therefore, tectonic in its proportion.

The result of the shock was the onset of a deep disconnection and shift between ongoing expected fundamental forces shaping forex prices. Before the financial collapse, the key driver of forex price was interest rates and expectations regarding changes in interest rates. In normal times, central banks — the Federal Reserve in the United States — use interest rate increases to dampen inflationary pressure and decreases to try and boost economic activity.

However, with the financial collapse and the collapse of the housing bubble, interest rate decisions of central banks, here and globally, became a moot point as a multi-year era of low rates resulted. During the recent great recession, the contraction of liquidity and GDP nullified the usual concerns about inflation for the Federal Reserve. As a result the Federal Reserve unleashed a massive monetary expansion. But the financial storm appears to be lifting and the inter-market patterns of the U.S. dollar and the U.S. economy are beginning to shift. There is evidence that the post-2008 global dynamic is running its course. However, a "new normal" era may be occurring, and with it a new set of opportunities in U.S. dollar and inter-market trading.

The case of the U.S. dollar movements in relation to the housing sector is such an example. Prior to the fall of 2008, we can see that the housing sector and the U.S. dollar experienced very close movements. After the collapse, the U.S. dollar oscillated in large swings, primarily acting as a safe haven basket.


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