Will the USD Continue Rallying?

Now that we see the USD rising again over 81 on the US Dollar Index (USDX) the question becomes will we possibly see 91 USDX sometime in 2010?

Yes very possibly, and we may see more than that. Let me explain. Since roughly fall 2007, the US Fed has been creating liquidity and even buying markets directly (home mortgage bonds for example) then when the US decides to roll that back, there is USD strengthening as institutions who borrowed Fed money with bad collateral have to repo the stuff and get dollars to buy the stuff back (repossess them).

Then, on top of repo activity starting after the end of March 2010, the Fed stated they intend to roll back QE (actual Fed buying markets themselves) and this would be market negative, since half of Fed liquidity infusions in 2009 was invested directly in markets by banks, instead of lent out. The same goes for all of China’s stimulus, much of their own stimulus money and huge bank lending in 2009 went into their property and real estate bubbles. (more)