USD Fundamental Analysis 10 August 2009

By William Doody
We believe that the U.S. Dollar has reached an inflection point. For the past several months, the Dollar has declined on “good news” indicating that the two-year global crisis was drawing to a close and that economic data was showing gradual improvement. To a large degree this reflects the view of the Dollar as a “safe haven” currency and the historically low interest rates established by the Federal Reserve. It is our view that this trade has reached its maximum profit and that currency traders should reevaluate their Dollar positions.

Moving forward over the next several weeks and months, we believe that the Dollar will appreciate against global currencies. On the one hand, we believe that most traders are net short the Dollar. If economic data does not show signs of actual improvement, the “safe haven” trade will lead those traders to unwind their shorts and move long. On the other hand, if economic data does show significant improvement in the second half of the year, we believe interest rates may rise sooner than expected, leading to a sudden and sharp reversal of the low yield selling of the Dollar which has occurred during the first half of the year.

We do not believe that economic data over the next several months will support the dramatic rise which has occurred in equity markets since March 2009. Thus we expect traders to begin buying the Dollar. This negative surprise, coupled with the extensive short-Dollar bias currently in the market, could produce unexpected strength in the Dollar between now and the end of the year.

Trading Recommendation

: Close USD short positions / consider small USD long position
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