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U.S. Dollar: From Panic to Embrace

US Dollar
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Russian Dollars

My friends mother lives in Moscow. My friend calls her mom often, and every once in a while the conversation turns to the economy, specifically, the strength of the U.S. dollar. Usually this happens when the dollar gets weaker. Their conversation goes something like this:

Mom: Everyone says the dollar is crashing. On TV they show lines at the banks where people are trying to exchange their dollar savings for euros or rubles.

Son: Mom, we talked about this. Every single time you've told me about these panics before, the dollar rebounds and surprises everyone. Don't you remember?

Mom: Yes, I remember, but everyone says it's different this time.

I once heard that there are more $100 bills in circulation in Russia than the rest of the world combined, including in the U.S. Don't know if it's true, but I believe it. Ever since the end of the Soviet Union, Russians have stored their wealth in dollars; later, in euros. The ruble has regained a lot of respect in recent years, but even today, nobody in Russia refuses dollars.

Last time my friends Mom and him had that conversation was in November. At that time, the dollar sentiment was so negative that polls showed dollar bulls in the single to low-double digits. Forex traders, analysts, the mainstream media, the public, they all believed it was doomed. There was even talk of pricing crude oil in something else and replacing the dollar as the world’s reserve currency.

Yet, despite all the crash-and-burn forecasts, on November 26, the USD turned up and so far, in terms of the EUR/USD (the most widely-traded forex pair) has gained over 600 pips. Here's what it looks like on the daily EUR/USD chart (copied from Elliott Wave International's intensive Currency Specialty Service Dec. 15 forecast):

In the weeks prior to the November bottom, EWI's Currency Specialty Service told subscribers over and over again that short dollar position was getting crowded, for two reasons:

1. The U.S. Dollar Index fell in five waves since March 2009. The buck also fell impulsively against currencies like the euro and Swiss franc. If you know Elliott, you understand what that means: A completed five-wave pattern implied a strong and surprising (for most people) reversal ahead.

2. Increasingly negative market sentiment right before the low.

Now that the dollar has gotten stronger, the question is, is this a major turn or just a correction on the way to lower lows?

You can get the answers now with our Currency Specialty Service. You get full coverage of the dollar, the euro, the yen -- 9 major currency pairs in all -- right now on the intraday and longer-term time frames. Click here to start.