Last week's market sell-off in U.S. stocks coincided an upshot in interest rates--one of the major anchor points being increased inflation expectations. Although the recent economic forecast from the Atlanta Fed points to economic growth at 5.4%, there's reason to believe that inflation expectations are greater at the rate that we're going.

Whatever the cause of the selloff is, the scenario bodes well for the U.S. Dollar in the near term. This could create a scenario for a relatively stronger dollar as we race back up to the top.

Important to note, the EURUSD has been tumbling down, due most likely to overall market fear. In this scenario the market would eventually get back on course, as the Euro has obstinately stayed on an upward path.

There are some significant factors to be wary of; such as, re-establishing trade in North America, and relative weakness in the U.S. economy. With the isolationist stance in America, it's hard to know if the U.S. will get back on solid footing to increase net exports, one major component to the GDP equation. Yet, there is increased federal spending. By passing the ever increasing defense spending bill this amount of government spending will become major support for overall U.S. GDP growth.

The closed-end fund discount indicator, a sentiment indicator, points to a lower Euro by the end of this week. The Euro has been effected by negative stock market sentiment, although this type of price action shouldn't be expected to last, the 10-year correlation between the S&P 500 ETF (SPY) and the Euro ETF (FXE) is 0.512, according to SPDRs Sector funds online. Here's a sentiment proxy for the S&P 500 via Social Market Analytics.
Notice a downward spike in sentiment scores for the index. One other strong point for the U.S. Dollar is the NFP jobs report coming in strong last week.

Another way to look at the market sell off is a loss of interest in the stock market (real interest rates didn't increase, per se). As inflation expectations go up, the bond market will invariably discount rates as it pertains to this expectation, one component of bond rates. With that said, there should be no permanent effect to the Dollar.

It's still something of a race for the Dollar as economic data is still showing a mixed batch of news. Countervailing the strong jobs report, productivity came in negative last week. Productivity is important to track, since technology is now embedded in every other sector oft the economy, and technology is a driver of productivity gains.

The trade system in the U.S. is shuffling the deck, so to speak, as countries leave the old NAFTA behind. The possibility of outside countries to make trade in North America is also on the table.

One of the main domestic policy issues for the U.S. is immigration reform. This has a great effect on overall economic activity in the U.S. and North America. The race back up is being supported by an anchor point from previous economic activity as well as the Atlanta Fed forecast, so there could be some positive action on the upside for the U.S. Dollar.

Dollar bulls shouldn't get their hopes up, however, because the trade agreements still have uncertain outcomes, with many varied possibilities. The number one priority for domestic policy right now is going to be the immigration reform, which will also effect trade. Also taking into account increased fiscal government spending, clearly this points to a mixed bag for the U.S. Dollar.
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