US Dollar: Rally May Have Legs

The primary theme in the currency markets today was the recovery in the U.S dollar as the greenback staged its strongest rally against the Euro since March. However it was a combination rather than a single factor that drove the dollar higher. Concern about the financial sector in Europe, Russia’s shift on reserve diversification, riots in Iran and risk aversion all contributed to the sharp moves in the currency market. In the past few weeks, the dollar become deeply oversold and was due for a serious bounce. Although we are long term bearish dollars the near term outlook has changed. The single biggest reason why investors and traders bailed out of the U.S. dollar over the past few weeks is because they expected central banks to do so as well and now that they have changed their minds, we expect the dollar to extend its gains. Alternatively, traders could wait for a deeper pullback in the currency market before reloading their dollar short positions.

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