Analysis: Dollar's detractors may be missing its comeback

Fri Jan 20, 2012 12:58pm EST
 
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NEW YORK (Reuters) - The dollar's many detractors may have missed it, but the much-maligned U.S. currency is on rise.

The greenback, thought to be on life support and mostly surviving on safe-haven flows, hit bottom three years ago and is now in a long-term recovery.

The dollar has been climbing since it struck record lows against the euro in July 2008, helped recently by the euro zone debt crisis, an improving U.S. economy and a return to the dollar as the reserve currency of choice.

The U.S. economic recovery alone is expected to push capital flows into the dollar. If growth does take root more firmly, it will reduce bets on more monetary easing, which has been a debilitating weakness for the dollar since the 2008 financial crisis.

The market is starting to agree in a way that it hasn't in nearly a decade. A key factor that points to more dollar strength can be found in the options market, where bets on the dollar's path against the yen is closer to favoring the dollar more than at any time in at least nine years.

"The deck is stacked, at least at the present, in our favor," said Jacob Gold, president of Scottsdale, Arizona-based Jacob Gold & Associates Inc., an investment strategy advisory firm for high net-worth individuals and companies.

Though up 13.6 percent from the trough in 2008, the ICE Futures U.S. dollar index is currently closer to that bottom than its peak, suggesting more room for improvement. It was last trading at 80.305 .DXY.

With the euro, which comprises 57.6 percent of the index, expected to fall to $1.20 in the next several months, according to Barclays, GAM and other firms, from the $1.2915 it trades at today, the index is bound to move higher. The euro has lost 19.5 percent since its last peak in 2008.

The six-member dollar index, composed of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, troughed at 70.698 on March 17, 2008 as the euro was testing its peak.   Continued...