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The dollar is weak because the world is not ending as expected

The title of this post is a bit tongue-in-cheek, but it's clear that the only time in recent years that the dollar has managed to rise above historical lows has been thanks to widespread concerns that the global economy was approaching an Armageddon of sorts. The most recent spike in the dollar was fueled by concerns that the Euro was about to collapse, but now we see that those fears were overblown.

The dollar's value since early 2008 has been pushed up by panic-driven demand for dollars, but it has been depressed by extremely expansive monetary policy. Given that fears still abound (witness 3% 10-year Treasury yields and $1200/oz. gold prices), the fact that the dollar is only about 10% above its historical lows against other major currencies, and only about 5% above its all-time lows in inflation-adjusted terms against all currencies, as the second chart shows, suggests that the Fed's willingness to supply dollars has on balance exceeded the world's demand to hold dollars. Thus, my continuing concerns that we will see higher inflation in the years to come, and my continued belief that if the U.S. economy is struggling it is not because of a general shortage of money. The problems out there center around the unprecedented expansion of the federal government, the threat of higher tax burdens, increasingly burdensome regulations, and and the general anti-business sentiment which seems to thrive in Washington these days. These are legitimate problems, to be sure, but they do not mean the end of the world.

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