How I'm Trading the Dollar

WHAT WAS AND IS - The US Dollar is holding up better than many thought and could still be looking to extend gains as we work into latter portion of the week. The dramatic 180 shift in sentiment towards the Dollar comes by way of the market refocusing its attention on Fed policy normalization and yield differential advantage, at a time when the Euro and Pound are both struggling in their own right on the back of slowdown in the respective economies. Even a recent run of not as hot US inflation data has failed to rattle the Buck, with the US ten year yield pushing back to its highest level since 2011 and the market clearly recognizing the Fed’s latest tweak in the monetary policy statement which acknowledged inflation no longer running below trend.

WHAT WILL BE - At the same time, it’s important to remember that despite a very healthy Dollar rally, when looking at the Buck against the major currencies, it is still only a recovery rally within a medium term Dollar downtrend. This means we are getting into areas now that could very well invite renewed Dollar selling. One of the themes that has been a major thorn at the Dollar’s side over the past several months has been US protectionism and a soft Dollar policy from the US administration. This has faded into the background as the Dollar has been rallying, but any signs of renewed campaigning on this front, which could come at any moment, will once again spell trouble for the Dollar. And so, we are reaching a kind of inflection point where we suspect the Dollar could once again be at risk and would recommend keeping a close eye for a move back the other way in the sessions ahead. And so, the takeaway is this - I believe a big sell-off in the Dollar is coming and I continue to look to position that way.