Author: Michael Arold
Model: Technical Swing
Disclosure: Long UDN
When it comes to the US Dollar, I can see analysts in two camps: one group is calling for an immediate rally to work off oversold conditions. After that, they expect further declines. The second camp is looking for further declines right away. It’s interesting that both parties seems to predict a long term weaker Dollar.
From a technical perspective, the US Dollar Index has been moving in an accelerating downtrend for the last three months and is rapidly approaching the 20-year low around 72. It would be telling to NOT see strength around that level:
Source: StockCharts, 5/4/11; Time frame: 5/4/07-5/4/11
But even if the Greenback experiences some sort of bounce, the longer term outlook remains questionable.
The Dollar would need a catalyst in order to gain strength and I cannot see one coming up. Basically, there are only three possible modes: (1) the Greenback could strengthen because of safe heaven buying, or (2) because the outlook for a stronger US economy improves, or (3) the Dollar could strengthen because other currencies weaken.
Let’s look at these scenarios:
1) Safe heaven: At least during the recent Japan catastrophe, the Dollar did NOT show strength, which suggests that the US currency hasn’t been considered a safe heaven. So I conclude that this catalyst mode will not materialize in the short-term.
2) Stronger US economy: Economic indicators recently kept signaling weakness, and US Treasury Yields are declining. Mr. Bernanke is expecting further weakness. Unless upcoming job numbers surprise, I do not see a catalyst here as well.
3) Weaker international currencies: Most major central banks are in tightening mode, which obviously supports their local currencies. The only potential catalyst could come from Europe, or to be more specific from Greece or Portugal. However, I’m surprised of the Euro’s strength in the light of negative headlines from these countries. My feeling is that Germany’s economic strength is actually trumping negative headlines from smaller countries. Keep in mind that Germany’s economic output is ten times higher than Greece’s GDP. So who cares about Greece?
In summary, I cannot see a major catalyst for the US Dollar coming up, which is why I’m actually shorting the Greenback. I recently reduced my position to take some profits, but would increase again on rallies.
