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Summary

  • The U.S. dollar has displayed rare strength over the past two months as it prints new year-to-date highs.
  • The dollar's attractiveness is subtly increasing as economic and geo-political factors are lining up in its favor.
  • The coming jobs report may provide additional clues on whether the dollar's strength will continue for a while longer.

The U.S. dollar index (NYSEARCA:UUP) has increased steadily all of July. The dollar index has gained 2% month-to-date. This matches a similar gain from the dollar's last low in early May to a peak in mid-June. Stringing these two streaks together, along with a marginal new high for 2014, and it suddenly seems like the U.S. dollar is experiencing a change in tone, albeit subtle.

Overall, the dollar remains stuck in an extended trading range; it is far too early to speculate on a breakout. However, note that the dollar has not been able to string together these kinds of gains since a sharp spike higher in February and March of 2013.

The dollar is almost running in a full sprint now

Overall, the dollar has essentially gone nowhere the last 2 1/2 years

Source: FreeStockCharts.com

This current run is important because many analysts had expected 2014 to be the dollar's year. U.S. economic growth was supposed to lead global growth but a harsh winter helped stunt those expectations.

Now with U.S. GDP growing in the second quarter at a 4% annualized rate,unemployment claims nearing pre-recession lows, the Fed apparently ready to end its bond purchases by October of this year, and expectations for the beginning of rate tightening in about a year, the dollar's relative attractiveness to other currencies is shining a little brighter. Increasing geo-political concerns are on the other side of the fence, but the dollar's rise is starting to make it appear ready to retake the mantle of "safety" or risk-off currency. At least it is increasingly difficult for traders to rationalize using the euro as a safety currency, as seemed to happen at moments during the euro's rally from 2013 lows: geo-political risks are in the eurozone's backyard with economic sanctions against Russia poised to impact economic activity.

I have also pounded the table for the U.S. dollar especially against the euro (NYSEARCA:FXE), yen (NYSEARCA:FXY), and Canadian dollar (NYSEARCA:FXC). A slide in the euro long-awaited by the European Central Bank (ECB) seems to be finally underway. So I am looking closely for a change in trading behavior against the Japanese yen. The dollar still has a way to trade to regain its 2014 high against the yen, but it is notable that the dollar has so far successfully held a strong level around 100.8 on USD/JPY. The yen was weak against all major currencies in the wake of the U.S. GDP release, so it is very possible that a resumption in yen weakness is around the corner.

After an extended consolidation period, the U.S. dollar finally looks poised to resume its 2013 strength against the yen

The British pound is putting a squeeze on the Japanese yen - an imminent breakout?

Interestingly, the Australian dollar (NYSEARCA:FXA) matched the Japanese yen in weakness. It looks like the Australian dollar has finally lost its upward momentum.

The Australian dollar finally looks like it has lost its upward lift against the U.S. dollar

Source for charts: FreeStockCharts.com

The timing is still early and several signs remain subtle, but it seems the arrows are starting to line up in favor of the U.S. dollar. The jobs report this Friday (August 1) could provide additional clues…

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net long the U.S. dollar

Source: A Subtle Change In Tone As The U.S. Dollar Achieves Year-To-Date Highs