USD Fundamental Analysis-23 July 2009

By William Doody
Weakness in the U.S. Dollar has continued in recent sessions as traders are willing to place riskier bets in light of better-than-expected corporate earnings data. The safe-haven Dollar and Yen trades have both suffered from the move towards higher-yielding currencies. While it is certainly too early to declare an end to the economic crisis, evidence for a gradual recovery does appear to be mounting. Over the long term, this should bolster trades against the Dollar, as the “flight-to-quality” trade is unwound. Meanwhile, the slow pace of the recovery will force the Federal Reserve to keep interest rates at extremely low levels, raising the possibility of inflation and further devaluation in the Dollar. For this reason, traders with a very long investing horizon should take a bearish approach towards trading the Dollar.

Meanwhile, the short-term trade will continue to be dominated by economic data. The only events remaining on the calendar for this week are jobless claims and housing sales on Thursday and business sentiment results on Friday. Next week, however, will be data-intensive, with important releases to include consumer confidence, durable goods orders, GDP estimates, and the Federal Reserve’s “Beige Book” of economic data. Additionally, several members of the Federal Reserve will be giving policy speeches during the week, including a multi-part televised interview with Ben Bernanke. Thus, traders should expect volatility over the next several sessions.

Over the next several weeks, we recommend a small long position on the Dollar, as recent moves in both equity and currency markets seem to have gotten ahead of actual data. Over the longer term, however, we recommend being short the Dollar, as we expect continued declines in the face of improving global economic conditions.