Fundamentals of the Dollar

The euro has been the punching bag of traders for a year now.  But the long term fundamentals for dollar weakness is still intact.  Contrary to what the pundits on TV say about the importance of growth rates on currencies, other factors are much more important.  The most important factor is supply.  If there is too much money supply, the value of that money will go down.  It is that simple.  The United States is a much more aggressive printer of money than the European Union or Japan.  Despite the large budget deficits in Japan, their money supply growth is very conservative.  Same with Switzerland, to a lesser extent.  

The United States is a liberal printer of money.  It can get away with it because it is a reserve currency and used extensively for international trade.  The U.S. government has abused this priviledge to run up huge budget deficits through big tax cuts, rebate checks, and all sorts of stimulus.  The Fed is more than happy to buy up this debt to keep rates lower than they should be. 

From a long term fundamental view, the euro and the yen should be valued higher than the dollar.  The Eurozone and Japan both run trade surpluses with the U.S.  They are not printing money like the U.S.  Europe is trying to fix its long term fiscal problems by taking their medicine and reducing budget deficits.  This hurts the currency in the short term, but is a benefit in the long term.  The U.S. is just kicking the can down the road with more stimulus, bloated budgets with big tax cuts, and more QE.  The trend is secular and will not change until the policies of the U.S. government and the Fed change.   I don't think the Fed will give up on QE until we get runaway inflation, which is still a long ways away (due to a lack of wage pressure).