[The once and future king]

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Its an easy trap to fall into, but overall markets are not driven by currencies, they are driven by production of goods and services.

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This may have been true once, but in recent times no longer applies. This can be easily proven by looking at recent movements in Equity markets.

In August subprime broke the surface the US housing market began to decline, and the credit crunch was underway. A few months later the DOW was hitting record highs. Why?

Because all the market cared about was the fact that the FED said it would increase the money supply which it went on to do by dropping interest rates by .5%. SO the markets didnt care about any downside to production or consumption, they only cared that the Fed was going to increase the money supply. The movement in the markets was purely driven by perceptions of currency manipulation by the central bank.

This has led to the bizare state that if the Fed says something along the lines of "There is danger of a downswing in growth in production, therefore we will cut interest rates" this is considered good news by the equity markets. Whatever the dangers are that are creating the possibility of retarded growth in production are seen as irrelevant all that matters is the growth in the money supply.

This can be clearly seen in the market movements over the last few day. Western CBs and major financial players have all issued increasingly bearish if not rabid bearish statements over the last week about the prospects for growth going forward, yet the Dow has has gone up over 200 points 3 days in a row. That is because the fed has indicated that given the negative outlook it will probably cut rates on 21st December. So again, in price movements, the actual negative data that leads to fears about growth and actual production etc, the real economy are seen as irrelevant and price movements have all been driven by the belief that an interest cut is due 21/12/07.

Thus it can be seen that price movements in the Dow and other Equity markets are driven allmost entirely by how those markets see currency manipulation occurring in the short to medium term. In short its all about the currency baby.