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US Dollar Update: Sudden Shift In Sentiment at Trader’s Narrative

US Dollar Update: Sudden Shift In Sentiment

At the start of this month, the anemic dollar perked up and traded above its 50 day moving average. Thanks to the dollar carry trade as a mechanism to reinflate the world’s banking system, the greenback had been dangerously close to the 2008 lows.

But while it looks like the US dollar has shaken off the carry trade woes, it is a little too soon to interpret the current strength as anything more.

So far, the US dollar index has rallied 5% in December. That may not seem like much but such sharp counter trend rallies are relatively rare. The last time we saw something similar was in late July 2008 - before the dollar went on a rampage peaking in March 2009. Contrarians who keep a finger on the pulse of sentiment should also be concerned that in concert with the firm price, dollar sentiment has also shifted.

US dollar rally Dec 2009

Small speculators are now positioned at the other extreme with +13,854 contracts net long. The contrast from a few months ago when the US dollar was the most hated asset out there is jarring. As well, the Bloomberg Professional Global Confidence survey indicates that global investors are bullish on the dollar (just like last March).

According to the consensus from almost 2,000 participants in the survey, the greenback will continue to climb in the next six months. Part of this belief is based on the improving economic conditions which will eventually force the Fed to raise interest rates. The about turn has taken many unawares. None more so comically/tragically than the US Dollar Index Bullish Fund (UUP) which actually ran out of shares and had to be halted until more were issued to meet the demand.

There are technical reasons also for an underlying strength in the currency. As I mentioned in my previous comment, the RSI indicator has been rising even as the dollar itself has fallen. The is also a similar divergence between the US Dollar and its MACD which you can see in this video. And don’t forget, the trade weighted dollar had already broken its downtrend back in November.

While this may indeed be the start of a powerful counter rally - or even (gasp!) the end of the bear market for the dollar - right now, right here, it has recovered too much ground, too soon, to be able to continue with this torrid pace.

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5 Responses to “US Dollar Update: Sudden Shift In Sentiment”  

  1. 1 Pej

    Yes, this is a long overdue rally in the most hated asset : the usd. I bought some against the Euro at 1.49 but this rally took me by surprise so my position is way smaller than what I would have aimed.

    Interestingly the long overdue correction in equities is not coming, even with this massive rally in the USD…

  2. 2 B7

    That’s funny. I was looking at this same chart last night. It is a real reversal from the trend that started in March 2009. I wonder how long it will last.

  3. 3 Dupont

    I think that the USD is getting stronger because China is buying a lot’s of it now.
    Why now? Well, during during this period of the year the volume is thin, so you need to buy less USD to make it stronger.

  4. 4 Tradermark

    Sold my UUPs today but if it gets over the 200 day I’ll be interested in getting it back

  5. 5 Gigem77

    Thanks to global investors for this: “The International Monetary Fund has said the dollar’s share of global currency reserves fell in the third quarter to the lowest level in a decade. The currency’s portion fell at the end of the third quarter of 2009 to 61.6 percent from 62.8 percent in the previous quarter. Data collected by the World Gold Council showed that central banks collectively bought $28 billion of gold at an average price of $978 ounce. ”

    These are macro shifts by the largest players away from the dollar and into other things. . .

    “According to Reuter’s calculations, the value of the U.S. dollar’s net long position was around $700 million in the week ending Dec. 22, up from a net short position of $1.98 billion the prior week, and ended 32 straight weeks of short dollar positions. ” They didn’t say if this was just the speculative side or also included the commercials.

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