Wednesday, June 10, 2009

U.S. Dollar Recovers: What's Behind the Rally?

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The U.S. dollar, beaten badly since late April, took the upper hand on June 5 and broke below a psychologically important price point of $1.40 against its main competitor, the euro.

But whatever you read in the financial press regarding the "reasons" for the dollar strength, they all pale in comparison with this one: market sentiment.

Sentiment -- or, to put it differently, how the players collectively feel about their markets -- is a powerful force. So powerful that when sentiment reaches either an optimistic or pessimistic extreme, more often that not you can expect the market to turn.

With that in mind, let's look at the recent sentiment about the U.S. dollar:

First, the buck has become a hot topic lately. The number of discussions in the media of "what's next for the dollar" -- along with dire predictions for its demise -- have shot way up in recent weeks, especially after the EUR/USD, the euro-dollar exchange rate, moved above the $1.40 mark.

Second, "[s]peculative bets against the dollar have risen to their highest level since the onset of the financial crisis," reported the Financial Times on May 26. So, both the public and professionals have been getting antsy about the dollar's future.

Last but not least, the U.S. dollar's Daily Sentiment Index has been scraping the bottom. As our own Mon.-Wed.-Fri. Short Term Update has been reporting to subscribers:

"At just 6 percent bulls on the [U.S. Dollar Index], pessimism toward the dollar’s prospects has grown to the level it was at the March 17, 2008, bottom. Of the survey respondents, 94% think that the dollar will continue lower from current levels -- that’s extreme. It’s time for the dollar index to rally ... we are short-term bullish the dollar." -- Steve Hochberg, Short Term Update, June 3 (online now)

Editor Steve Hochberg backed up his June 3 forecast with this chart of the Dollar Index (DX; some labels have been erased for this article):

US Dollar Index
This selection from The Short Term Update is a good example -- one of many -- of how watching market sentiment and Elliott wave patterns can warn you of impending trend changes. As for all the "reasons" for the dollar strength you find in the media -- they may do a fine job of "explaining" why the turn has occurred. But they tell you little about the dollar's future -- and isn't that what really matters?

To learn where the dollar is likely headed next, read the latest issues of our Short Term Update (risk-free).

For intensive, 24-hour-a-day forex market coverage, try our Currency Specialty Service.

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