USD Fundamental Analysis 19 August 2009

By: William Doody
The Dollar has continued its march to the downside in recent trading, with only Monday’s sharp move higher against the backdrop of a global equities selloff the exception to the trend. Traders are continuing to see the Dollar exclusively in terms of its safe-haven characteristics against an equity decline and, as they have become more eager to take on equity risk, have exited positions in both the Dollar and Yen. Now, some analysts are calling for further declines in the Dollar based on their critical view of U.S. trade and budget deficits. On top of all of this negativity, the continuing fear of many traders is that Chinese and Middle Eastern states will begin demanding an alternative reserve currency to parallel or even replace the Dollar.

We have expressed the position in recent weeks that the Dollar’s selloff is overdone. If economic data supporting a “V-shaped” recovery does present itself, then we project a rapid recovery in the value of the Dollar. If such data does not appear anytime soon – or worse, if economic releases begin to suggest a second leg down – then we expect equities to drop sharply and the safe-haven money will return to the Dollar and Yen. Either way, it seems to us that the greater probability is for a stable to higher Dollar, rather than a lower Dollar.

Economic data likely to impact currency trading for the remainder of the week include jobless claims numbers on Thursday and housing sales reports on Friday. The continued strength in U.S. and global equities depends on accelerating improvement in both sets of data. Accordingly, currency markets will be keeping a close watch for signs that the economic recovery is gaining momentum.

Trading recommendations: Consider small long USD position