USD Fundamental Analysis 12 August 2009

By William Doody
Currency traders will focus on this afternoon’s policy statement from the Federal Reserve. While no change is expected in the Fed’s lending rate, traders will carefully parse the wording of the statement due for release at 14:15 EDT (18:15 GMT).

In particular, traders will be looking for hints as to the Fed’s thinking on three key issues:

  • To what extent will economic growth increase during the second half?
  • What is the Fed’s “exit strategy” for ending the current ultra-low rate policy?
  • Will inflationary pressures increase in the near-term?

While the answer to each of these questions is a potential negative for the Dollar, we believe that traders may be surprised by what they learn in the Fed’s statement. We are increasingly convinced that economic growth in the remainder of the year will be tepid, at best. Indeed, as disappointing industrial inventory data released Tuesday showed, the economic crisis may have ended, but the recovery has clearly not begun in any measurable fashion. As a result, we do not believe that inflation is a significant risk for the remainder of 2009 and, therefore, there is no need for the Fed to plot an “exit strategy” from their current ultra-low rate policy. Should the FOMC statement on Wednesday contain any of these points, we would view this as highly bullish for the Dollar, especially in the face of rising levels of anti-Dollar sentiment among currency traders and analysts.

Thus, we reiterate our recent contrarian position to be long the Dollar.