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The Taper Trade and the U.S. Dollar

Taper is here and our trade is clear.

Markets have responded definitively in the first six trading days of the year. Assets which have benefited from the Federal Reserve's bond-buying largesse are down. The dollar (which has been debased by Fed printing) is up.

Central bank commentary over the past 24 hours has further reinforced what markets are already telling us: Tapering is happening because recovery in the U.S. is happening faster than in Europe.

Bloomberg tracks 84 foreign exchange strategists, and collectively they forecast a decline for the euro of 5 percent to 1.29 by year end. Looking at the dollar index, which measures the dollar against a basket of currencies including the euro, the recent 80 level has provided consistent support and sets the stage for a potential rally.

As Citigroup strategist Bryan Zarnett wrote to clients this morning:

We have modest changes in the overlay portfolio this week, adding further to our CAD and SEK shorts, offset by increasing our US long.

We agree with the dollar bulls.

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