Fundamental Analysis USD-6 August 2009

By: William Doody
The Dollar has continued to trade weakly against other major currencies as global equity markets have extended their surges to post-crash highs. Traders have moved sharply away from the Dollar in recent weeks as economic sentiment improved and riskier, higher-yielding currencies have become more attractive.

We view the recent move against the Dollar as being overdone and would be buyers of the Dollar at this level. In the short term, the strength in equity markets has reached speculative extremes and any correction there will lead to inflows into Dollar positions. Similarly, we believe that traders may be overly optimistic concerning the magnitude of any second-half recovery this year. Instead, a more reasonable view would be to position for a slow-growth recovery over the next two years. Such a position would provide support for the Dollar at or near current levels. A catalyst for a change in the short-term trend could be Friday’s unemployment release. A negative surprise in the data would certainly be bearish for equities and bullish for the Dollar as traders scramble to unwind riskier positions in favor of a return to the “safe-haven” of the Dollar.

Thus, we recommend closing short-Dollar positions at this point and we would buy the Dollar on any further weakness ahead of Friday’s data.