The case for USD support

In the days after the Fed announced QE more than a week ago, we saw obvious USD weakening.
Against the major currencies like the EUR, GBP and AUD the USD lost up 600 pts at its height, helped by rallying stocks. These sure make very good trading opportunities.

However, from here, I feel the trend for dollar weakening is perhaps less clear.

I'd not bet against the USD on a long term basis without looking out for clear signs what policymakers around the world will do next.

Recent strong selling of the GBP and EUR highlights the market's unwillingness to hold on to these currencies. The UK is in the midst of QE as well, and the EUR is still waiting for a breakthrough, or an implosion.

Note that Chancellor Merkel rejects the idea of a US-style stimulus package due to a huge national debt size, so I don't expect the EZ to go down this road to boost the economy. Their options are getting limited.

The idea of the Fed's QE is that as treasuries are bought from private hands namely agent banks, the economy enjoys more cash floating around, and thus forcing down the value of the USD.

However, what is observed from the TARP experience is that, money being pumped into banks stays just within the banks. Less than the desired amount is being pushed out into the rest of the economy on fear of corporate and consumer defaults.

QE this time around might suffer the same fate. As it is unclear how much money is being dumped into the system, so is USD weakness.

Furthermore, the case for USD support is that it is still, one of the safest if not the safest on a relative basis.

If true weakening of the USD were anything to go, my guess is it'll probably near the bottom of the recession when things are looking up again, and when banks will lend more freely, and when money velocity starts to head up.

Let's hope that comes sooner than later.