Better Days Ahead for the Dollar?

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Currency investors got frisky in the third quarter and risk currencies rose, but this strategist senses a mood shift.

Maybe it was the pledge by European Central Bank President Mario Draghi to do "whatever it takes" to save the euro, or maybe it was just something in the water. Whatever the cause, investors saw the third quarter through rose colored glasses, and risk currencies benefited.

Well, the fourth quarter is starting off with a very different tone, what with multiple central bank meetings, a U.S. election and the looming prospect of the fiscal cliff, an onslaught of year-end tax hikes and government spending cuts. That means that "if Q3 was about positioning for the risk-on advance, then Q4 may be about protecting those gains" by repositioning, says Marc Chandler, chief currency strategist at Brown Brothers Harriman.

Chandler argues that while bullish sentiment has been lifting major foreign currencies against the dollar, "there simply are too many brinkmanship games being played in the major financial centers to expect this to persist."

Investors are starting to change their tune, Chandler says: "over the last two weeks, we have been observing a deterioration in the tone of the major foreign currencies against the dollar. This has continued over the past week and looks set to continue." Specifically, the technical tone of the Canadian dollar, Australian dollar, euro, and British pound have all deteriorated, he says, with the five-day moving average for many of them set to move below the 20-day moving average.

If you've been enjoying a nice risk-currency ride, it may be time for a second look.

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