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How the Dollar Could Stay Strong

The dollar has held up surprisingly well post-downgrade, and this strategist says the strength could continue.

You might think that a ratings downgrade and an explicit Federal Reserve announcement that interest rates aren't going anywhere would hurt the dollar. But lo and behold, it hasn't been beaten down as badly as you might expect. Can it last?

Adarsh Sinha, head of Asia Pacific G10 FX Strategy at BofA Merrill Lynch, says investors are moving away from some developing market assets and going where growth prospects look stronger. But, he says, "I'm not convinced yet that even if the Federal Reserve does go down the path of quantitative easing over the next six months that the dollar will necessarily weaken."

How's that?

"What's crucial for the U.S. dollar is, do we just see a slowdown for the U.S., or does that slowdown translate to global weakness?" Sinha explains.

In the past, when the U.S. economy has weakened, it's been negative for the dollar.

However, he says, "When the slowdown spreads to the rest of the world, and in particular if we do see slower than expected growth in emerging markets, that scenario tends to be quite positive for the U.S. dollar."

Sinha says the situation right now is "pretty finely balanced" and a global slowdown is a distinct possibility.

Still, Sinha's current favorite currencies are the British pound and the yen. "Sterling is quite a nice alternative" if you're nervous about the dollar or the euro, he says, and while he thinks the Bank of Japan could intervene further against yen strength, "the fundamentals are going to keep it strong, not just against the dollar but against other currencies as well."

You can watch the discussion in the video clip.

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