12.9.10 The US dollar’s fundamental outlook is generally bearish. The Economic forecast is anemic, the Fed isn’t expected to lift rates until at least late-2011 and the bill for today’s stimulus promises to extend the financial pain for some time. In turn, these current issues feed into the more consistent effort to diversify away from the dollar in international trade and central bank reserves. However, this does not commit the greenback to immediate declines. Considering that valuation in the FX market is relative, the dollar is imbued with its safe haven appeal and its alternative-asset function. However, neither of these drivers took control this past week. In the second half of last week, the dollar would put in for a sharp correction of November’s remarkable rally as the anti-euro flow was pinched off. That said, the reversal was limited. Instead of a true change of trend, the market instead has turned to congestion. We seem the same lack of commitment in both EURSUD and the S&P 500 (our benchmark for risk appetite trends). That accounts for the dollar’s two primary fundamental supports. Now, with risk trends fading into year-end liquidity and euro fear having seemingly run its course; we are starting to see fundamental traders go back to the basics – stimulus. This week, US President Obama struck an accord with the GOP to maintain tax-cuts in exchange for an extension of unemployment benefits. Aimed at encouraging growth with a side effect of inflating capital markets; this has also led to a sharp drop in 10-year Treasuries. Is the market starting to recognize the ill effects of too much debt and too many dollars?