FINANCIAL POST

U.S. Dollar to feel more heat
 

By: Don Vialoux   March 23, 2010
The U.S. dollar has a history of peaking in March and moving lower until at least June. Is history about to repeat?

Seasonal influences A 20-year seasonality study recently completed by EquityClock.comshows that the U.S. dollar tends to move higher in January and February, peaks in March and trends lower until at least the beginning of June. The U.S. dollar index currently has a deteriorating technical profile. The index reached an intermediate peak on Feb. 19 at 81.34. Short-term momentum indicators, including moving average convergence divergence and relative strength index, have rolled over from overbought levels and continue to trend lower. Intermediate downside risk is to the top of a previous trading range at 78.45.

Fundamental influences The U.S. dollar is expected to remain under pressure until at least June this year, due to a series of political and economic events:

The financial crisis in Greece is close to resolution. Greece's political leaders know that a resolution must be reached shortly in order to avoid default on its sovereign debt. Meetings later this week will determine whether resolution is achieved through the International Monetary Fund or through European finance ministers. A resolution will strengthen the euro and weaken the U.S. dollar.

Recent actions by members of the U.S. Congress against China potentially could lead to an international trade and finance crisis later this year. Last Monday, a group of 130 Democrat and Republic lawmakers petitioned Treasury Secretary Timothy Geithner to brand China a "currency manipulator" when he releases a report on the subject in April. The lawmakers are saying that the Chinese are in effect subsidizing exports by maintaining a low value of the Chinese currency relative to the U.S. dollar. Under legislation proposed by lawmakers, the Treasury Department is required to identify countries with "fundamentally misaligned currencies" and to issue a "priority action" against them.

Countries on the "priority" list could face a range of U.S. responses, including a revision to dumping calculations, a halt in government purchases of goods and services and a restriction on trade finance and insurance.

The lawmakers seemed to have forgotten that China is the largest holder of U.S. treasury securities and, until late last year, was the largest purchaser of treasury issues used to finance the U.S. government's mounting budget deficit. China owns more than US$700-billion of U.S. treasury securities. The Chinese already are responding to a growing protectionist stance taken by Congress. A report released last week revealed that China was a net seller of U.S. treasuries for the third consecutive month in February. Relations between China and the U.S. have deteriorating significantly in recent weeks due to a series of issues, including the U.S. sale of weapons to Taiwan, the threat to Google's presence in China and cyber attacks reportedly initiated in China. Chinese efforts to liquidate even a small portion of their treasury securities could place significant downside pressure on the U.S. dollar.

A decision by the Federal Reserve last week to maintain a low interest rate policy rather than to protect the U.S. dollar with a policy of slightly higher interest rates also adds to downside pressure on the U.S. dollar

What to do The U.S. dollar is following its seasonal pattern once again. Preferred strategy is to avoid investments in U.S. dollars unless fully hedged. Commodities priced in U.S. dollars will see higher prices under this scenario. Basic material and energy securities will outperform as the U.S. dollar moves lower.

- Don Vialoux, chartered market technician, is the author of a free daily report on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca.

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