Fundamental Forecast for the US Dollar: Bullish

The bruised and beaten US dollar launched a vigorous counter-attack against the major currencies having found a bottom in early November as a four-month surge in risk appetite found itself without fuel to continue. That advance had largely owed to expectations of renewed quantitative easing (QE) from the Federal Reserve, a possibility initially floated at the Jackson Hole central bankers’ summit in August. When Ben Bernanke and company made good on the rumors, they delivered just about what the markets had priced in over the preceding months, leaving the rally without the impetus to continue and opening the door for investors to take profits on risk-linked positions.

In the week ahead, this underlying tendency toward risk aversion will find added fuel in a toxic mix of geopolitical and sovereign risk as North Korea threatens open war with its southern neighbor while the Euro Zone struggles to reassure jittery investors about its ability to deal with festering debt problems on its periphery. KCNA – North Korea’s official news agency – said “escalated confrontation” would lead to war on Friday, adding it was “ready to give a shower of dreadful fire and blow up thebulwark of the enemies.” Turning to Europe, Portugal managed to pass its austerity-laden budget, but bad news continued to flow out of Ireland where the ruling Fianna Fáil party lost a key by-election in Donegal South-West, narrowing its majority in the lower house of parliament (the Dáil) from three to two seats and threatening the passage of its budget on December 7.All this plus the specter of a slower Chinese economy – the world’s second-largest – with reserve ratios set to rise 50bps as of Monday may prove hard to swallow,hinting the path of least resistance points lower for the spectrum of risky assets.

Soft readings on key US economic data – the bellwether for the state of the global recovery at large – promise to bolster the likelihood of continued risk aversion. The ISM gauge of manufacturing activity is expected to show growth in the sector slowed in November while the all-important Nonfarm Payrolls report reveals the labor market snapped a three-month winning streak as the private sector adds fewer jobs in November as it did in the previous month.

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