Currently, Japan appears to be less eager to engage in intervention and
indicated that this is more of a weak dollar problem than a rising yen problem.
Perception seems to indicate that no action will be taken until the ECB begins
to feel their threshold of pain. No one but the head of the ECB seems to know
what price threshold will bring down the red flag and force Europe's hand to
intervene with their currency versus the U.S. dollar. Many analysts seem to
think 135/140 is a key area.
Any policy changes in the Federal Reserve's Federal Open Market Committee's
Statement indicating that they would be more aggressive towards raising rates
would also give the dollar at least a temporary boost. So far, the rise in the
Fed Funds rate has been at a "measured pace" as reflected in their policy
statement at their last meeting on November 10th. Several market participants
also view the likelihood of another .25 basis point hike at the next meeting on
December 14th. However, a Fed Funds rate of 2.00 or 2.25% is still historically
low. Until we approach much higher levels in the Fed Funds rate, I view any
rallies in the U.S. dollar as selling opportunities.
Another factor to be aware of is, who will be replacing Alan Greenspan when he
retires on January 31st, 2006. Any mention of a "hawkish" replacement could
also spark a swift rally in the U.S. dollar.
Aside from the rhetoric, hedge funds have been increasing their long positions
in the currency and gold markets. If they continue to defend their positions,
there could be exaggerated moves, which could push these markets even further.
Given that we are approaching the end of the year, I would have to favor
aggressive action by these hedge funds to improve their year-end statements.
Several funds use trend-following methods and seek markets that have the
potential to "break-out" of congestion patterns for a sustained move. On the
other side of the coin, if the funds start bailing out of their positions, a
nasty correction could occur.
That being said, a wide range of markets will be affected by movements in the
U.S. Dollar Index. That leaves a wide assortment of affected markets to trade. |
