U.S. Dollar Soars To A Five-Week High: What Now?

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U.S. Dollar Soars To A Five-Week High: What Now?
"Fundamentals" can hardly explain the dollar's recent strength

By Nico Isaac
Wed, 09 Dec 2009 16:15:00 ET

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Long since thought of as "the rotting corpse" of the currency markets, the U.S. dollar reawakened to new life this week by rallying to its highest level in more than a month. For many -- namely those affiliated with the financial mainstream -- the dollar's revival came as a huge surprise.

Reason being: The two main fundamentals that supposedly drove the dollar to its 2009 "deathbed" were still very much in force. To wit:

The Interest Rate Factor: According to the usual pundits, the persistent, easy money policies of the Federal Reserve have held the dollar's head below water. Those being: Ten rate cuts in 12 months to a historic low of 0%. Here, a recent Wall Street Journal writes:

"Ultra-low rates have weighed on the dollar as investors use cheap dollars to fund bets in riskier assets, such as the euro and other high-yielding currencies... For [a sustained change in the dollar's trend], the Fed would have to be moving clearly toward an exit of its extraordinary easing measures."

Flash to December 7: That day, the Federal Open Market Committee released a very "dovish" periodic statement in which chairman Ben Bernanke reaffirmed his commitment to an "extended period of low rates." YET -- the U.S. dollar has continued to soar.

Next, the Economic Factor: Here, I'll let the following news item do the talking: "For most of 2009, the paradigm in the currency markets has been that good economic data was bad for the dollar as investors shun the low-yielding greenback... on hopes of a faster recovery." (Wall Street Journal)

YET -- in the wake of a recent, better-than-expected Jobs report, the dollar experienced its strongest single-day rise in a year.

(Will the Dollar Rise Again? The latest Financial Forecast Service teams up to offer the most comprehensive coverage of the near-, and long-term trend changes in store for the U.S. currency. Get the full story today, absolutely risk-free.)

Here are the facts, as they objectively stand: The most recent uptrend in the U.S. dollar got started on November 26, with a powerful burst to five-week highs on December 4. Whatever has been going on in the fundamental backdrop, the dollar's rise has been uninterrupted.

And, few saw that coming with more clarity and consistency than EWI's Short Term Update. Here, the following excerpts from recent issues tell the story:

November 25 Short Term Update: "The US Dollar Index is making a 'final probe' to complete the wave structures. When viewed in the context of the daily chart, the decline from the November 3 high still looks best as a fifth wave, which is an ending wave. A rise above __ level will be the initial signal that a low is in place."

December 4 STU: "A Bottom in the US Dollar Index. The initial leg of this turn up should be sharp, as overleveraged dollar bears are forced to cover their position."

Subscribe now for the latest insights in the December 9 Short Term Update, absolutely-free.

Tags: U.S. dollar, U.S. dollar, cash, U.S. Federal Reserve (the Fed), U.S. Federal Reserve (the Fed), Ben Bernanke

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