Economic inconsistency-which theory can prove this?

This topic is devoted to the USD. What is happening now, good economic data or bad, tend to drive the USD down.

What is happening now? Well, everyone in the market is selling USD, which of course, is driving the USD down. the Yen has risen to its highest level against the US since 1995. The AUstralian Dollar has reached parity with the USD, and this trend is looking to continue.

One reason for this is that people are speculating on the Fed's QE (Quantitative Easing) policy. This means the Fed is looking to buy bonds, and injecting liquidity (more USD) into the markets, hence, the larger the supply the lesser the value of the USD compared to other currencies and commodities.

Right now the actual amount that is to be injected is not certain depending on the strength of the US economy. However, what ever happens is pointing to a weaker USD. Now what do I mean by that.

Well historically, recessions, weak economic periods seem to be negatively correlated to the USD. When economies are fragile, people tend to seek safety, and that's in the USD. So any signs of bad economic situations translate to stonger US Dollar. HOwever, this is not the case anymore. The weaker the US economy, the higher the amount QE the Fed has to inject into the economy, meaning weaker dollar. If, on the other hand, the US economy improves, then there is a lower chance of the Fed actually introducing QE2, which in turn, means that it would support the strength of the USD. Really? Not at this situation. Better economic reading also means that people will turn into risky assets such as other currencies, commodities, and equities. SO if economic reading is better than expected, the USD is likely to fall even further as people tend to move to higher yield assets.

SO What is the direction of the USD, when bad economic data means more USD to be injected into the economy, and good economic data mean people are more willing to riskier assets? This question will remain a strong debate until we see the result in November. Until then, please share your thoughts and what direction the US dollar is likely to move.