In March and April, I thought the Dollar was near a low, as sentiment was almost universally negative, and the global economy was likely to slow and lead the ECB to cut rates. I was wrong about the ECB, but the global economy has slowed. I recommended buying the Dollar on any dip below the March 17 low of 70.70. On April 22, the low was 71.19, and on July 14 the Dollar dipped to 71.31. Close, but no cigar. Last month, I suggested shorting the Euro on any new high. I thought it could drop to 1.5300, with the potential to decline to 1.4900. Never got the new high, but the Euro did fall from 157.29 on July 28 to 146.09 on August 19. Since the low on July 14 at 71.31, the Dollar has recovered to 77.41. These are enormous moves in just 3 weeks.

From a long term perspective, the Dollar made a low in February 1991 at 80.34, September 1992 at 78.19, April 1995 at 80.22, and December 2004 at 80.39. This means there is a wall of overhead supply between 78.19 and 80.39, which is not much higher from current levels. The rally in the Dollar was not the result of a positive change in the outlook for the U.S. economy. It was the result of a perception change regarding the economies of Great Britain, Japan, and the EU for the worse. Sentiment toward the Dollar has improved noticeably with the rally. Declines in bull markets are often violent, as longs late to the party are washed out, while rallies in bear markets are intense due to short covering. The declines in the Euro, gold, oil, and other commodities bear the characteristic of a bull market decline, while the Dollar’s rally fits the bill of a bear market rally. If the U.S. remains as weak as I expect, another period of Dollar weakness is likely.

Establishing a small short position in the Dollar on any move above 78.00, or long position in the Euro under 144.75 makes sense in expectation of a rebound in the Euro to 148.50, and fall in the Dollar to under 75.00.

www.welshmoneymanagement.com [1]