Fundamental Outlook for US Dollar: Bullish

- Dollar enjoys safe haven status, loses interest rate potential
- Has the dollar’s late-week correction altered the bullish revival?

Dollar bulls seem to enjoy a bit of schadenfreude. While the financial markets are under strain and the risk of a full blown crisis is at its peak, the benchmark currency shines for its safe haven properties. Without this background preoccupation, the greenback seems relatively lackluster compared to its primary counterparts. With a benchmark lending rate just above zero, a growth forecast that calls for a significant cooling of pace in the second half of this year, an overwhelming debt load and the nagging concern that the world may one day trade out their dollars for some other reserve currency; the currency will struggle to compete on an even playing field. However, markets are dynamic and speculative interest is an indelible component of its normal functioning. For this reason, the basic assumptions of relative growth and yield are only impressive or disappointing so far as investors are excessively greedy or risk adverse. Considering the fundamental waves that are seen over the coming week, this particular angle promises to define the dollar’s next move.

At the very forefront of the fundamental trader’s mind is what will happen over the weekend. Concerns over Greece contributed to the greenbacks’ gains last week and it also set the benchmark to its sharp correction. Therefore, it is reasonable to believe the same source of activity will maintain its continue to define volatility – at least through the near-term future. This event is at the brink of another critical stage. No longer is there doubt that the nation is in trouble. Now, they are holding out their hats and asking for assistance. What does this mean to the dollar trader? If confidence or the EU fails Greece, this country will very likely default, exit the monetary union or find some other unique and painful solution. This will almost certainly hurt the euro in the eyes of investors; which will send capital fleeing to its primary counterpart (the US dollar). Wading deeper into this scenario, if Greece falters; it would likely send credit and financial market ripples across the world. Considering the current, over-extended level of most growth-related assets, such a catalyst could have dramatic consequences. That being the case, the traditional harbor for rough seas – the greenback – will open to all.

Another interesting event over the off-market days is the summit in Washington DC. The G-7, G-20, IMF and World Bank are scheduled to meet and discuss the economy, financial health and the conversation is likely to shift to Greece at one point or another. Given the highly dynamic nature of the markets at this point, it would not be unusual to see a promise relating to international policy. However, domestically, dollar traders will be looking for confirmation to speculation that the Federal Reserve is planning on selling off the assets on its bloated balance sheet. Such a move would be a big step in the hawkish direction and pass another milestone to the inevitable rate hike.

And, to round the risky week out, we have a round of major scheduled event risk. The FOMC rate decision won’t offer any changed to the Fed Funds rate; but we will be kept busy watching the discount rate, possible changes to non-standard policy and closely interpreting the language of the statement for timing cues. Offering far better opportunity for clear price action is the advanced reading of the 1Q GDP figure. Due Friday, this reading is actually expected to downgrade the economy’s robust pace of recovery as the stimulus fuel runs thin and the market starts to take over. Though expected, such a downshift could significantly cool interest rate speculation.

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