Having neared the 2008 low of 71.05, the U.S. Dollar Index has sharply reversed course over the last month to post impressive gains. There is disagreement, though, over whether this rally can be interpreted as a real recovery in the dollar or a continuation of the risk on/risk off bottom bouncing of recent years.
Andrew Wilkinson, senior market analyst at Interactive Brokers LLC, says the dollar rally confirms what the Federal Reserve has been saying all along that rising commodity prices were transitory. “The Fed chose to look through them, and that caused the dollar to spiral. Now that the commodity bubble has burst to a degree, that has taken a lot of the pressure off central bankers to widen yields relative to the dollar, and that’s played right back into the hands of dollar bulls,” he says. Wilkinson warns, though, that the dollar could rally significantly without breaking its downward trend. He sees key levels at 77.00 and 73.00 to indicate the longer-term direction.
Kathy Lien, director of currency research at GFT, isn’t quite so optimistic about the dollar’s prospect. Instead, she says we are seeing a situation where the dollar is rising simply because everything else is doing so poorly. “The primary reason we’ve seen such a significant rally in the U.S. dollar is because we have such uncertainties around the world that drove investors back into the safety of the U.S. dollar. Nothing really has changed on the U.S. economic front; we’ve only seen continued disappointment in U.S. data,” she says. Lien points to continued European sovereign debt problems and slowing in the Chinese economy as evidence. She sees short-term resistance coming at 76.60 and 78.00, and support at 74.00 and 72.70.