Tuesday, September 22, 2009

Dollar Pain Will Continue This Week
Joe El Rady

Tomorrow’s Fed announcement, which I predict will leave interest rates unchanged, should comfort Dollar bears and reinforce their position.The current mix of bad domestic news regarding growth (as the Fed should state tomorrow: impeded economic growth due to curtailed bank lending) and better international news regarding financial stabilization and economic growth, will continue to encourage investors to forego the safety of Dollar and Yen denominated assets for higher-yielding ones.

The Dollar has fallen to a one-year low against the Euro and weakened versus the Yen on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets. The demand for dollars had temporarily inflated due to the flight to safety induced by the global financial meltdown. Good news, however, comprises bad news for the Dollar as stabilization reduces its safe-haven demand.

Nevertheless, some reflux may occur. Specifically, what started as a fundamental strategy may, as usual, devolve to a momentum induced and self-reinforcing bubble causing an oversold market for Dollars (some even think the Dollar has already crossed the oversold line). Furthermore, the dollar remains the global reserve currency, and as such, will rise on any hint of instability in global financial markets.