The U.S. Dollar is likely to strengthen in the near term, as data points to a gradual recovery in the U.S. economy and as traders remain wary of taking on excess risk. While lagging indicators such as jobless claims continue to rise, suggesting the possibility of a slow and uneven economic rebound, there are increasing signs that the U.S. economy is in the process of bottoming. Thus, traders are becoming more optimistic about second-half prospects for U.S. companies and for the U.S. currency.
Meanwhile, the Euro looks to come under pressure against the Dollar, as a number of potential concerns remain for Eurozone policymakers to address. Reform of the financial industry remains uncertain and the pace of bank lending is abysmally slow. Recent data out of Germany suggests that manufacturing remains below expectations and an economic rebound in 2009 is highly unlikely in second-tier EU markets such as Spain or Italy.
The Dollar also stands to benefit from the desire of traders to hedge against unexpected market events. The safe-haven qualities of the Dollar make it likely to appreciate in value during any type of economic, financial, or geopolitical upset. Thus, we expect most traders to maintain a net long position on the Dollar for the next several months.
Year-to-date, the Euro has appreciated 1.46% against the Dollar. We would take a long-Dollar / short-Euro position at this time, based on our view of continued improvement for the Dollar and likely weakness in the Euro.