Fundamental Outlook for US Dollar: Bullish

- The market weighs the possibility and consequences of a move away from the dollar as the world’s reserve currency
- A rebound in risk appetite threatens to undermine the greenback’s safe have status
- Technicals show the dollar on the verge of either a major breakout or trend revival across the majors

There is so much event risk looming next week for the US dollar that it is difficult to discern what the primary fundamental driver for the world’s most liquid currency will be. Will the greenback be evaluated for the pace of its recession within the global slump? Can the currency’s safe haven status rise above all other concerns like it has for most of this year? Or, is the threat that the most actively traded fiat money on earth might lose its sacrosanct status as the world’s reserve currency too monumental to avert our attention from? These are the pinnacle of fundamental drivers in the currency market and there is certainly a hierarchy of importance; but which one takes the reins on the dollar may fall to a specific set of circumstances.

In determining the greatest threat to the US dollar, we can learn from the financial crisis that has plagued the markets now for more than a year-and-a-half. Through tumultuous 18 months, investors have had to deal with diminishing returns, soured risk trends and a global recession. However, the real panic set in when the true functioning of the markets were called into question. When liquidity in the credit markets were threatened, the markets went into a tailspin. For the dollar, the loss of its reserve status would be its equivalent to disaster. Trough all its other guises (funding currency, carry currency, safe haven, etc), the greenback has always found demand through its use as store of wealth for central banks and as the international currency for commodities and other global goods. There has long been an argument to trade the dollar in for something else to set the global standard. Just a few years ago, the calls were for the dollar to be replaced by the euro; and now in these times of turbulence, the prevailing sentiment is for a basket. The IMF and China among others have vowed to bring this demand up at the G20 meeting on Thursday; but will this see a popular vote? Unlikely. This could have untold effects on a global market that is already suffering. On the other hand, should this burden be lifted from the dollar’s shoulders, the currency could find the impetus to rally.

If the G20’s only focus and influence were over the safe haven status of the US currency, it would be easy to lay out clear scenarios for price action following the event. Any real changes to its role in the global market place would send it plunging; and its passing without incidence would allow lead to a rally. However, it isn’t that simple. Policy makers will cover more than just the dollar at this meeting. Their real purpose for the gathering is to try and develop a global resolution to the world’s economic and financial troubles. There have been calls for greater fiscal spending, larger bailouts and other unique solutions; but there has so far been little cooperation beyond coordinated rate hikes and bolstered swap lines. Ultimately, for the dollar, it will come down to whether there is any meaning joint efforts to come out of this meeting at all. If there are, any plans will be judged on their ability to relieve the US from shouldering the responsibility of turning the global economy around all by itself. Alternatively, empty words and promises will once again call on its safe haven roll.

Both reserve currency and safe haven roles are relatively new market dynamics. In contrast, economic growth is a constant for fundamental traders. In all the commotion towards the end of the week, the monthly non-farm payrolls report should not be overlooked. Economists suspect another 660,000 Americans lost their jobs through March. This would bring the tally since the recession officially began on January 2008 to well over 5 million. Numbers like these still need to be measured against global benchmarks, but this does not provide the dollar any solace. With other indicators like consumer confidence, ISM manufacturing, ISM services and construction spending, this looks to be a week that will give a very rounded and timely measure of economic activity.

Jamie Saettele is a Technical Currency Analyst for FXCM.