Bullish on the US dollar for some time

As traders, we are less concerned with where the market has been and more interested in determining where it will go; but in this move we can establish a few meaningful questions that can guide our forecasts. First of all, we have to establish that the primary fundamental drivers for the currency remain: underlying risk trends; its status as a funding currency; and relative interest rate expectations. I have been bullish on the US dollar for some time; but on reflection of these broader fundamental drivers, the greenback has made little fundamental progress on any of the three. Investor sentiment held strong through the end of the year (as seen in the Dow’s buoyancy); US funding is still the cheapest among its most liquid peers; and the potential for a timely Fed rate hike was actually tempered through the final quarter. So, if all of these bearish factors are still in place; why did the US currency rally? To maintain a push to new extremes for any financial instrument (whether it be 16-month for EURUSD or 14-years for USDJPY) requires fundamental moment. All of these aspects may still exist; but they are not being fed by the influx of sidelined capital that bolstered risk appetite with reckless abandon throughout 2009. Moreover, stalled confidence further encourages profit taking before the year’s end. Now, looking ahead to a new year; the dollar still looks to benefit should risk appetite collapse, US market rates rebound or the Fed signal it is ready to return to a hawkish regime. However, should all of these trends remain, the dollar’s December rally may prove a brief reprieve in a larger trend.