U.S. Dollar: Beginning to Trade on Fundamentals?

Last updated 12/14/2009 9:11 AM ET (GMT -5) 6 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Kathy Lien

Director of Currency Research, GFT

Since the beginning of the year, forex traders have grown accustomed to the U.S. dollar trading against U.S. fundamentals. In other words, the dollar would sell off on positive U.S. data and rally on weak data. The counterintuitive price action was driven by the dollar's safe haven status and when bad news would spell trouble for the U.S. economy, investors would flock into the safety of the low yielding currency. In contrast, when economic prospects brightened, investors would plow out of dollars into higher yielding and riskier currencies. However since the beginning of the month, this dynamic appears to have changed. On the heels of a dramatic improvement in non-farm payrolls, the dollar began to strengthen as the outlook for the U.S. economy brightened. Last Friday's retail sales report indicated that the moderation in job growth has translated into stronger consumer spending, supporting the fundamentally driven rally in the dollar.

Is This Just a Phase?

The next obvious question to ask is whether this is just a phase for the dollar. In the short term, we believe that good data should continue to help and not hurt the dollar as traders readjust their expectations for Fed tightening. If the U.S. economy continues to improve at its current pace and global economic risks stabilize, even the ever skeptical Federal Reserve may have to recognize the need for tighter monetary policy. Although there was no U.S. economic data release this morning, news that Citigroup reached a deal to repay $20 billion in government aid, Abu Dhabi's $10 billion support to Dubai World and Exxon Mobil's $31 billion stock deal ($41B including $10B in debt) to acquire XTO Energy Inc. has helped the dollar hold onto its gains. However at the same time, we do not see further gains in the dollar until the FOMC rate decision on Wednesday. Dollar bulls are still relatively insecure and therefore need confirmation that the Fed has been swayed by the recent improvements in U.S. economy. Based upon last week's comments from Fed Chairman Ben Bernanke, it is not clear whether or not the Fed is convinced that the improvements are here to stay.

Capacity Utilization in Canada Retreats

USD/CAD

Comments (6)

klien

December 14, 2009 at 11:22 AM ET

There was a downward revision to 67.7% from 67.4% for Q2. This has been updated on the calendar

IT

December 14, 2009 at 11:19 AM ET

I don't understand. Your own calander of economic events say's that capacity utilization improved for Canada. Whats going on?

FX4Sure

December 14, 2009 at 11:32 PM ET

Good post, I'm kinda insecure right now about EUR/USD, can't understand technical data around this news, NFP and Retail Sales was crazy.

trader

December 15, 2009 at 12:50 AM ET

should improve slightly I reckon again for the dollar. Outlook mixed.

trader

December 15, 2009 at 02:25 AM ET

should i just go long dollar right now ? Daily tech's looks overbought for a few majors especially EU and GU ? Tough stance. I have had margin calls few times trying to answer these questions but mainly due to overleveraging.

trader

December 15, 2009 at 02:26 AM ET

Huh, actually oversold. I meant oversold and moving upwards on daily charts. correction for above.

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.