Although I am long term bearish dollars, I cannot ignore the fact that the near term outlook for the greenback has changed. Important technical levels (1.40 in the EUR/USD, 1.60 in GBP/USD and 97 in USD/JPY) have been broken and there is a good chance that economic merits rather than risk appetite could be driving the dollar.
The greenback weakened tremendously over a short period of time and was due for a serious bounce. The lack of major U.S. economic data until Wednesday of next week could lead to a further rally in the dollar as the euphoria from the non-farm payrolls report lingers over the currency market. I have been both short and long term dollar bearish since the beginning of May and even though my views on reserve diversification have not changed, it may be better for traders to wait and rebuild those dollar shorts at higher levels. I believe that the sharp rise in bond yields is a combination of stronger investor confidence and concern about U.S. public finances.
Since the beginning of 2008, there have been numerous “corrections” preceding strong rallies in the EUR/USD ranging anywhere from 3.5 to 6 percent. From this week’s high of 1.4340, a 3.5 percent correction would take the EUR/USD down to 1.3840 while a 6 percent correction would take the currency pair down to 1.3480.