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The USD: Beware the Counter Trend Rally

Why is a dollar worth more today against the euro than it was last week? Does it have anything to do with the fundamentals of the US economy?

David Bloom, global head of fx strategy at HSBC argued persuasively on the show last week that the role of the $ has changed. Bloom says the $ has gone from being a pro-cyclical currency to a counter-cyclical currency. The dollars value responds to the international flow into and out of various assets. Because of this shift in $ behavior any desire to chase growth and investment opportunities around the world is a negative for dollars. So, when emerging markets rally the tendency has been for the dollar to decline.

That fall is also distorting the $ role says Bloom as any anchor currency and price setter of commodities. There is a new kid on the block called the euro......and it has benefited from the world's desire to reduce exposure to the greenback.

Ok so far - but why does the dollar rally? Bloom says it will rise on a structural shift in the trend in the US current account deficit. He says since the $ began to weaken in 2002 the deficit has been showing signs of shrinking. Unfortunately for dollar bulls Bloom doesn't think that driver will put a solid floor under the $ until next year.

Which suggests recent days may only describe a temporary lifting of $-short positions. Bloom thinks there is a major change in the dollar's anchoring role as a reserve currency taking place. And it may still go somewhat lower from here......before next year's real change in fortunes.

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