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What Good News Could Do to the Dollar

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The economy has been producing upside surprises lately - and that could be bad news for the buck.

From jobs to housing to trade, the U.S. economy has been generating a series of positive surprises.

At Citigroup, Todd Elmer, an analyst there, says the bank's Economic Surprise Index has moved "from close to a record low in June to nearly a record high at present."

Nice, huh? Just not for the dollar.

When the surprise index has had earlier upside moves, the dollar has taken a hit, Elmer says. "Stabilization in economic indicators relative to expectations boosted risk appetite and encouraged dollar selling." And Elmer says it's just a matter of time before the pattern repeats itself.

Many traders have essentially closed their books for the year, and others may be reluctant to take on big new positions right before the end of a quarter.

But "as we move into 2012 continued strength in data flow could have a more powerful impact in convincing market participants that they may have overestimated the real economic drag from the European crisis," Elmer says. "The surge in data flow itself may be insufficient to reverse recent risk aversion, but it does suggest that USD weakness could reassert itself more quickly and forcefully than many anticipate once conditions settle down."

Dollar bulls, be careful out there.

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