The Case for a Stronger Dollar | Forex Fundamental Analysis

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The Case for a Stronger Dollar

There are no shortages of cheerleaders for short dollar positions, however, I think there may be some misplaced enthusiasm for this trade. There are still fundamentals pointing towards a strong USD in the near term. This means that the current rally in the EUR/USD could be nothing more than a bull trap and traders should beware. stronger dollar

There are several reasons I am suggesting that the real trading opportunity right now in the currency market may be towards a bullish correction on the USD.

1. The ECB is fighting a stronger euro by lowering the overnight rate. This could slow the flood of cash into the EUR by making euro deposits less attractive and would stunt the growth of the EUR/USD.

2. Commodity prices are still low overall. Oil prices are below $40 a barrel. If the USD was really losing its intrinsic value, we would have expected a rise in commodity prices not a decline.

3. Treasury yields are dropping every day. The 10 year index ($TNX) is hovering near a break of 2%. Yields are the inverse of note prices and the rise in prices for notes represents demand for safer assets and the USD needed to purchase and hold them.

4. The financial crisis is still in play. That means that currencies that act as reserves or shelters during times of uncertainty are likely to remain in demand. That includes the USD and the CHF (Swiss Franc).

When looked at together, these fundamental factors seem to point towards a potential rise in the value of the USD not a decline in the near term. What seemed like an decrease in the value of the USD over the last several days seems more likely to have been an increase in the value of the euro. This means that diversification is still a good idea but reversing long USD positions into short ones is probably not a advisable.

Symbols related to this post: ($TNX), (INDEX: $OIL), (NYSE: UUP), (EUR-USD)