Fundamental Forecast for the US Dollar: Bullish

The US dollar began a broad-based rebound in November, rising the most in six months after the Federal Reserve made the official its $600 billion expansion of asset purchases. The increase matched what investors priced in over the preceding months – a process that produced sharp rallies in stocks, Treasury bonds and gold while weighing heavily on the greenback against the spectrum its top counterparts – opening the door for profit-taking.

Last week, we suggested this dynamic would continue to drive the US currency higher, with the only potential bump in the road being the follow-up FOMC meeting to November’s major announcement. Indeed, the greenback sold off ahead of the rate decision but finished the week higher after Ben Bernanke and company opted to make no changes to existing monetary policy. Looking ahead, there seem to be no significant barriers to continued profit-taking on QE2-linked positions in the final two weeks of the year.

Lingering sovereign risk fears in the Euro Zone – a catalyst for risk aversion – and a broadly supportive set of US economic data reinforce the likelihood of the greenback’s advance. Indeed, the EU’s establishment of a permanent bailout fund for troubled member states is unlikely to calm markets considering the ratification process is unlikely to be completed in a hurry while mounting stress in countries whose rescue is beyond the scope of existing European Financial Stability Facility (EFSF) – like Spain or even Italy – is a clear and present near-term possibility. Meanwhile, US third-quarter Gross Domestic Product figures are set to be revised higher as Home Sales, Durable Goods Orders and Personal Spending figures print broadly better in November.

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