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Dollar Strength in 2013? Not So Fast

Christine Balderas | Photodisc | Getty Images

Friday's jobs number was impressive, no doubt, especially in light of Hurricane Sandy's extreme destruction. It's almost enough to make an investor believe in the economic recovery.

That's fine - but if you think a strengthening economy will give the dollar new muscle, think again, says Steven Englander, global head of G10 FX strategy for Citigroup.

"Currencies follow asset markets, not growth, so we are skeptical that the expected bounce in US GDP will convert the USD into a risk-on currency in 2013," he wrote in a note to clients.

But what about the yen? Isn't there a long dollar-short yen trade that makes sense?

Not right now, Englander warns. "The yen's negatives are increasingly prominent – economic deterioration, external weakness, geo-political conflict with major trading partners, physical and human capital outflow, and increasing pressure on the BoJ. However, we worry about: 1) short JPY positioning 2) reduced BoJ bashing after the election and 3) zero rate support from the Fed. A sharp move up is more likely than a sharp move down, but an upward grind to USDJPY is the most likely outcome."

In other words, sure, you can buy the dollar against the yen. But you'd better be patient. You won't get a big bang from the buck anytime soon.

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