The weaker dollar has not sparked any flight from US Treasuries. In fact just the opposite as 10-year yields fall 9 bp on the day, back to the 2.60 level. Weak economic data this morning (jobless claims hit a 20-odd year high and the trade deficit widened) along with a slump in equity prices this afternoon have overwhelmed any fears that foreigners will abandon the US and interest rates will have to soar to attract capital. Every dollar downside blip brings the chicken littles out of the woodwork and today is no exception. Tentative moves toward quantitative ease on the part of the Federal Reserve are another matter and are prompting some considerable jitters over the potential dollar impact, at least in he short-run.
The ECB is at war with its self as the Germanic-bloc tells the market it is nearly done easing while Club Med talks about how to ease once rates have dropped below zero. It is hard to see the ECB employing novel strategies against a backdrop where opinions is so divergent, but we’ve yet to hear much from M’ Trichet on the subject. He did not rule the idea out at the December press confernece but it is clear he’ll have a fight on his hands from the Germans.
The dollar appears to be easing more as a result of the deleveraging trade slowing down. To extrapolate to much further seems a stretch, at this point.