Has the U.S. Dollar Bottomed?

Did the U.S. Dollar bottom on Thanksgiving? Since then, the greenback is up nearly 5% in response to sovereign credit fears, beginning with Dubai and then spreading to Greece. We have been arguing that the "short dollar, long everything else" trade is among the most crowded we've ever seen, and that the near term threat of deflation could cause a bullish reversal in the dollar. Dubai and Greece are proof that the global credit crisis is still unfolding with deflationary impacts as a result. In response to this new dollar strength, risky assets, particularly commodities, have endured swift corrections. Examples: gold is down nearly $130 from its December 3rd high; crude oil is off 10%; emerging markets are down nearly 5%. U.S. equities, surprisingly, continue to show impressive strength, even with today's selloff. However, the S&P 500 has been stuck in a narrow range near the 1100 level for over a month, despite recent economic data that continues to support recovery.

Does Thursday's market action - higher dollar, lower risky assets - signal a major change? Only time will tell, and the fact that the holiday season is upon us, we will likely have to wait until the first of the year to gain confidence in any trend change. In the meantime, we recommend a cautious approach through year-end...and the purchase of more dollar exposure on weakness.