The US dollar rally triggered over a week ago by ECB President Trichet has been relentless, and as of Friday’s NY close, the dollar index had appreciated to seven-month highs. Meanwhile, event risk for the US will be relatively light for much of the week, though the release of the producer price index on Tuesday could contribute some strength for the US dollar as the annual rate is forecasted to surge to a 27-year high of 9.3 percent. However, the big event to watch will be Friday’s speech on financial stability by Federal Reserve Chairman Ben Bernanke at the Kansas City Fed’s annual symposium in Jackson Hole, WY.
[B]Fundamental Outlook for US Dollar: Bearish[/B]
- Dollar rally goes undeterred despite drop in US retail sales for first time in 5 months
- US CPI hits 17-year high of 5.6 percent in July, adding to the Fed’s inflation concerns
- Nevertheless, US Consumer Confidence rises for second consecutive month as drop in oil leads inflation expectations to ease
The US dollar rally triggered over a week ago by ECB President Trichet has been relentless, and as of Friday’s NY close, the dollar index had appreciated to seven-month highs. However, given the extent of the move, forex positioning as measured by FXCM SSI shows that traders are growing less bearish on the currency. Since SSI is a contrarian indicator, the shift suggests that the US dollar could be in for losses soon. It is worth noting, however, that the greenback has been trading differently across the majors and price action will not necessarily be uniform. So which pair will be the best to take advantage of a decline in the currency? According to Quantitative Strategist David Rodriguez’s British pound forecast, GBP/USD could be a good option.
Meanwhile, event risk for the US will be relatively light for much of the week, though the release of the producer price index on Tuesday could contribute some strength for the US dollar as the annual rate is forecasted to surge to a 27-year high of 9.3 percent. However, the big event to watch will be Friday’s speech on financial stability by Federal Reserve Chairman Ben Bernanke at the Kansas City Fed’s annual symposium in Jackson Hole, WY. His commentary tends to be extremely market-moving for not only the greenback, but also for US Treasury and equity markets (and thus, the Japanese yen crosses).
Given the uncertainty surrounding the health of US financial institutions, commentary on the financial markets will be watched closely and bearish sentiment by Mr. Bernanke could weigh heavily on risk-appetite. On the other hand, if Mr. Bernanke signals optimism that the US economy and financial sector can weather the storm, the US dollar and risky assets, in general, could gain. Overall, though, the odds are in favor of US dollar declines by the end of the week. – TB
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