Friday, December 11, 2009

Can The Dollar Continue To Rally?

The chart below shows the US dollar index, which is the performance of the dollar vs. a basket of other currencies. You can see how it has spiked higher recently, and is now trading above its 50-day average for the first time in many months. The question is: can the rally continue?

Yesterday on CNBC, one of the more vocal dollar bears - Jim Rogers - said he is currently long the dollar, although he doesn't plan to stay long for too much longer. So this is an interesting juncture. If the dollar can consolidate here, and move higher, it could put additional pressure on the crowded short dollar/long commodity trade, which would likely weigh on the overall market in the short-term. But if the dollar falls back below that 50-day average, I would expect the trends that have been in place to remain through year-end.

Today the dollar is higher, and it seems to be overshadowing the positive economic reports that were released this morning. Oil is trading lower to nearly $72, while gold is down for another day, nearing $1120. The Nasdsaq is also lower today, while the S&P is roughly flat.

The University of Michigan consumer sentiment survey was surprisingly upbeat, coming in at 73.4 vs. 68.8 consensus. Business inventories rose +0.2% (vs. -0.2% consensus), and Advance Retail Sales rose a better-than-expected +1.3% (vs. +0.6% consensus).

The 10-year yield is also rising today, after a lackluster Treasury auction yesterday, hitting 3.55%. But the VIX is still lower, down -1.6% to 21.96.

Trading comment: In addition to the strong dollar, the weak financials have been holding back the market as well. I am still picking away at adding to positions, but we need to see one of those two factors reverse for the market to really get going. The possibility for another push higher before year-end is pretty good, but the timing of it is hard to tell right now.


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