US Dollar Confounding the Experts

The stronger dollar has confounded the experts since the 2006 bottom in mid-May and the more recent bottom in August. Several items usually help predict the direction of the US Dollar. First, loose fiscal policy and tight monetary policy have often resulted in a stronger dollar. This was the case over the last year or so but a recent surge in tax receipts that results in a narrowing of the budget deficit could signal changing dynamics. Second, high consumer spending usually leads to lower savings rates and a lower dollar. Recent indications are that the consumer is beginning to back off slightly on spending and save more, again producing somewhat of a mixed message. Our forecast is for the US Dollar Index to continue to muddle along in a trading range of 84 to 88 for the next several months.

Strategy Update: We had a small long dollar position in the Dynamic Fx Strategy that we reversed on the close today. We think the dollar reverses within the trading range but have a weak enough conviction that our position size is small. The majority of the portfolio continues to be invested in intermediate treasuries. Dynamic Fx has outperformed the Lehman Aggregate Bond Index benchmark by 2.75 percentage points year-to-date. Visit our website for information on Strategies investing.