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.
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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