Dollar Makes Gains in Markets But Optimism May Be Premature

NEW YORK (Forex News Now) – The big storyline in global forex news today was the strong showing by the dollar, moving up against most major pairs in the first positive day for dollar-centric investors in weeks.

As of 4:00 PM EST, the dollar was up 0.45% to 82.11 on the yen, 0.88% to 1.3872 on the euro, 0.56% to 1.587 on the pound, 0.33% to 1.0136 on the Canadian dollar, 0.54% to 0.984 on the Aussie, and 0.44% to 0.9643 on the Swiss franc.

This news is certainly welcomed by investors and policymakers alike who have been looking for a resurgence in the currency since its 2010 peak against the euro in June.  The move today has certainly caused some to look optimistically for a continued drive for the dollar – but analysis suggests such an outlook is premature.

It is true that the dollar has been the victim of a continued bearish trend in the market, and has sunk continually towards what some hope to be a bottom on the back of poor global forex news.  But, the reversal upwards is perhaps based more on wishful thinking than it is on genuine, fundamental strength in the currency.

The Federal Reserve looks like it is still set on some form of quantitative easing, perhaps as soon as November of this year.  Unemployment is still high, and there are few signs that the American economy is growing significantly or picking up real, tangible strength.

Global forex news aside, though, the rise of the dollar could be in spite of poor fundamentals.  It appears as if traders are betting that the dollar is largely over-sold; as a result, the dollar has witnessed a substantial gain today based on market conditions instead of currency strength.

US economic recovery

Investors looking to profit in the near term off of current market conditions should be advised that market and currency fundamentals are, on average, form a more sound foundation for forex decisions than positional momentum. The dollar is still tied to the American economy, which shows little signs of improving dramatically within the next quarter.

As long as the threat (and likely, promise) of quantitative easing and additional stimulus remains on the table, the dollar will be limited in its upward momentum because traders see losses pending just over the horizon.

Expect the market to move in response to the release of the minutes for the September meeting of the Federal Open Market Committee on Tuesday.  The body is not expected to announce anything major, but traders will nevertheless act on what can be inferred from the announcement – perhaps pointing to November action from the Fed.