Dollar bears on the retreat

Year-end profit taking should boost the Dollar

From early in the year, the dollar’s direction has been mainly one-way and with the market eyeing the massive budget deficit the dollar has been sold on just about every correction higher.

There are a few weeks of effective liquid trading left before the end of the year and with modestly better signs from the economy the market is beginning to sense that it could be tough trying to force the dollar any lower. Last week’s attempt to push it lower was quickly countered with some solid buying.

However, the yen has strengthened sharply to its highest level in 14 years against the dollar benefiting as investors pull their funds and repatriate them back onshore. Today’s 6 percent drop in the Abu Dhabi and Dubai stock exchanges in early trading today may well send another shock wave through the markets though it hasn’t yet generated any reaction in the value of the yen as Asian markets rallied on hopes that the crisis will not spread to other markets.

Indeed, U.S. consumers are beginning to loosen the budget strings and the housing market continues its modest recovery on the back of the extra-ordinary government spending packages.

That isn’t to say the risks have disappeared as backroom murmurs still discuss the risks of more U.S. banks announcing more debt write-offs and even the potential for some larger banks failing.

So as we move into thinning end year trading the immediate risk is for one more bust of dollar strength against the Europeans, but limited against the yen. It should leave the currencies in a wide trading range for around 2 weeks, maybe three before another round of dollar buying takes us into the New Year.

There still is a mild risk that the yen could see one more round of strengthening but should remain well above the 79.70 low in April 1995. However, with the market now leaning towards a firmer U.S. dollar in general the yen is at risk of rising against the European currencies.

Ian Copsey
www.fx-forecaster.com

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