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Dollar: Cautiously Bearish

Last updated 5/18/2009 9:30 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

In recent reports, we have outlined the various reasons why we believe that the U.S. dollar is headed lower on both a short term and long term basis.  From a short term basis, we believed that risk appetite would improve this week with U.S. housing and manufacturing numbers due for release ( Arguments for Short and Long Term Dollar Weakness ).  These are 2 sectors of the U.S. economy that have been the first to crumble and now they are the first to recover.  The recent weakness of the U.S. dollar will accelerate a recovery in the manufacturing sector even if global demand remains depressed.  

However the sell-off in the U.S. dollar is starting to become overextended and therefore traders should be cautious.  According to the latest Commitment of Traders report of non-commercial or speculative positioning, traders have reduced their long dollar exposure significantly.  In fact, net long positions in the dollar are the lowest since 2008.  Traders have also increased their net long positions in euros by 142 percent in the last week, which is why he EUR/USD is having such a difficult time rallying.  The British pound on the other hand saw an increase in net short positions. This suggests that the GBP/USD has plenty of room to rise.  If the market's risk appetite continues to improve, we could see a short squeeze in the British Pound.  For EUR/GBP, this means that the .8800 level could be broken.

The Commitment of Traders report is usually a good leading indicator of extremes or tops and bottoms in the currency market. 

Source: Bloomberg

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.