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Why the Dollar Is a Deal

A variety of economic factors could finally push a certain currency pair through a key level, this strategist says.

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Jens Nordvig, head of fixed income research and global head of G10 FX strategy doesn't shy away from bold predictions. More often than not, he's been right, too.

Right now, Nordvig is bullish on the buck.

"The US data has surprised to the upside lately, especially in relation to housing and household consumption, " he wrote in a note to clients. That is already having an effect on the Treasury yield curve, and he thinks the dollar is likely to rise along with interest rates.

In Japan, conditions are less auspicious, Nordvig says. The trade balance is deteriorating, and "Japanese firms are aggressively investing outside Japan, as a strong JPY causes higher purchasing power and domestic growth expectations remain weak." That will lead them to sell yen and buy the currency in their target countries. On top of all that, "increasing political pressure suggests to us that concerns over JPY appreciation among policy-makers are unusually strong." That's not exactly a formula for currency strength.

Given the combination of factors moving the dollar and yen, Nordvig believes the dollar could break through the key 80 yen level in the fourth quarter. In the firm's model portfolio, he is buying the dollar against the yen "around 78.80, with a stop at 77.00 and target at 82.00."

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