From the September 2013 issue of Futures Magazine • Subscribe!

Dollar days coming as Fed prepares exit

Dowd, however, sees the dollar’s slide in July as an opportunity. “It has had a nice little retracement down from where it had been; you cleaned out a lot of weak longs,” he says. “The fundamental focus going into year end is going to be dollar-bullish; I am expecting new highs in the dollar index going into year end. You will see the dollar trading up around 85.50-86.00.”

Jason Rotman, president of Lido Isle Advisors, says the data needs to justify dollar confidence. “A lot of people are looking for the U.S. dollar to start to go up again and break this year’s high of about 85, but it is not doing that, it is not coming close,” Rotman says. “For the U.S. dollar to continue its 2013 bull trend, it will need several months of phenomenal nonfarm payroll growth and even start to see the core [Consumer Price Index] numbers [come in] consistently above expectations because the Fed does not want to crash this market with a premature statement of stimulus reduction.” 

FXCM Chief Currency Strategist John Kicklighter sums up the divergence of opinion on the dollar: “For the remainder of the year, one of the takeaways is that it is going to be extremely volatile.” 

He adds, “It is a game of competitive stimulus. It is going to have an impact on the dollar. If we see the taper occur in September, it is the thing that could cause the dollar to continue higher.”

One reason why Kicklighter is expecting greater volatility is the divergence between the S&Ps and the carry trade. “You have a strong correlation between the S&P 500 and the carry trade index (see “Volatility watch,” below). Just over the past three or four months you have seen a very substantial divergence in their performance,” Kicklighter says. “This is one of those early warning signs that you get when the markets [don’t assume] that there is going to be very low volatility. I don’t think there has been a carry trade because of these concerns. The carry trade has a lot more room to unwind, especially if things get dicey.” 

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