Dollar Index Tests 2009 Lows as Bull Market Speculation Intensifies

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Includes: UDN, UUP
by: Daily Forex

New home sales continue to rise, carry trades are back in the spotlight, and predictions of resurgent global market proliferate. The dollar index is responding with breaking lower and lower, emphasizing the end of the safe-haven plays for now. And the online forex trading world is abuzz with agitated traders speculating about all kinds of unusual scenarios.

The Index fell to 78.57 this morning in New York, having come within reach of the previous June 2nd low of 78.33 for this year. Meanwhile, the US currency depreciated to as low as 1.4298 against the Euro today, which is the lowest since June 3rd. The fall of the dollar index is mirrored in the east by the rise of many Asian currencies, including the Korean won, which rose to 1.244 per USD today, and the Indonesian rupiah, which appreciated to 9.96 per U.S. dollar.

In addition to the speculative frenzy, the recent rally in risky assets is fuelled by the continuous flow of better-than-estimated results from companies and governments around the world. Today the German consumer confidence index also rose to a 14-month high versus expectations of a much more modest improvement. Traders responded by taking the Euro higher, and piling onto riskier assets such as emerging market currencies while stock markets around the world are building on their gains.

Meanwhile, on the carry trade front, the Australian dollar is continuing its unhindered climb against the yen, with some analysts already declaring the 80 yen level to be within reach. The trend in the carry currencies is further bolstered by the continuing fall in volatility. The U.K. pound, which rebounded very sharply from the lows of early this year rallied to high as 1.6504 early today, as reports showed no change in house prices for many districts.

In spite of Mr. Bernanke’s reassurances to the contrary, the market seems convinced that dollar strength is a topic of the past, as global trends, apparently unlimited new issuances of government debt, and continued dynamism in the rest of the world saps all life from the U.S. currency. The Federal Reserve Chairman recently emphasized the central banks’ commitment to the strong dollar policy, but did not give any hint that he would commit anything beyond words and declarations toward the realization of the policy.

The bull run in currencies coincides with increased attention by many investors and traders to currency trading. Forex brokers are reporting new account openings fuelled by strong advertising campaigns and speculation about further strong losses by the U.S. dollar.

Disclosure: No positions