Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Dollar Imminent Upside Reversal?

Currencies / US Dollar Sep 19, 2009 - 05:12 AM GMT

By: Sy_Harding

Currencies

Best Financial Markets Analysis ArticleThe U.S. dollar fell to a 12-month low against most major currencies on Thursday, with by far the majority of currency traders believing it will continue its freefall. And on the fundamentals, the dollar doesn’t seem to have much going for it to reverse the trend.


Global interest rates are at historic lows, but few as low as the record low Fed Funds rate of 0 to 0.25% in the U.S. The European Central Bank’s key interest rate is also at a record low, but at 1%. That creates lucrative opportunities for speculators to borrow dollars at low cost, and invest the proceeds in higher-yielding assets elsewhere.

Further pressure on the dollar is coming from major trading partners of the U.S. They receive inflow from their exports in dollars, and if those dollars are declining in value, it tempts them to sell dollars and buy other currencies.

Meanwhile, with global commodities priced in U.S. dollars, still other countries, particularly oil-producing countries, are unhappy with the dollar being the world’s primary currency, as they are also being paid with a currency that is declining in value.

So pressure that began from China, Russia and Venezuela to have the dollar replaced as the global currency by a balanced ‘basket’ of various currencies, is spreading. A few weeks ago even the United Nations Conference on Trade and Development called for replacing the dollar with a ‘global’ currency.

There is also little incentive for the U.S. to intervene in currency markets to support the dollar (as global central banks often do to support their currencies when necessary). The U.S. is struggling to come out of a severe recession, and anything that makes foreign imports more expensive for U.S. consumers, and U.S. exports less expensive for consumers in foreign countries, is a boost for the U.S. economic recovery.

So the U.S., as it has done for the last ten years, talks a good talk about how it supports a strong dollar, but does nothing about the situation.

Fed chairman Bernanke, perhaps inadvertently, prompted last week’s further plunge in the dollar when he stated that the U.S. recession has probably ended technically, but that the recovery will be slow with potential pitfalls along the way. That was taken by currency traders as an indication that the record low interest rates in the U.S. will probably be in place for quite some time yet, encouraging currency traders to increase their short-sales of the dollar.

But be careful about jumping in against the dollar at this point.

As with all market moves, after its big decline the easy money to be made by betting against the dollar has become the talk of the financial media, with “Sell the dollar, buy the Euro,” the most popular advice from analysts.

But with big profits having already been made by the smart money that entered near the top in July, and the trade being belatedly popularized in the media, it’s more likely time to be watching for an upside reversal.

Here are two reasons why I think an upside reversal may be near for the dollar.

Investor sentiment against the dollar has become extremely one-sided, which must have professional currency traders on the edge of their seats ready to take profits. The Bloomberg Dollar Bullish Sentiment Index has fallen to 30.8, from a high of 68.86 a year ago, its lowest level since it fell to 30.3 in March, 2008.

It’s of interest to note that March, 2008 marked the bottom of the dollar’s multi-year plunge from its high in 2004. From that low in March, 2008 the dollar rallied 25% to its peak in March of this year. And here is sentiment against the dollar back to that extreme of bearishness.

My second reason to think an upside reversal in the dollar may be near is that in its decline, as I show in a chart on my daily markets blog, the dollar has now become very oversold beneath its 30-week moving average.

The long-term history is that its 30-week m.a. acts as a powerful magnet on the dollar. Any time in the past that the dollar was in a bull market and became overbought (over-extended) above the m.a., it soon pulled back at least to retest the support at the m.a., even if it was then to resume its bull market.

More important to the current situation is that any time in the past that the dollar was in a serious decline and became oversold beneath its 30-week m.a., it soon began to rally back up at least to the m.a., even if it was destined to then resume its decline.

Given the current high level of short-selling of the dollar, any upside reversal that begins would likely result in short-sellers being forced to the buy side to close out positions to an unusual degree, creating a fast spike-up move.

So those are my reasons for believing this is not a good time to take new positions in this so-called “easy money” trade.

Additionally, with other markets, including gold and the stock market, so closely linked to the direction of the dollar, keeping a close watch on the dollar for a possible reversal may well be more important than watching those other markets themselves.

Until next time.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily market blog at www.SyHardingblog.com.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in