Dollar Will have to Turn to Risk Aversion as Rate Forecasts Dim

Over the past week, the dollar has maintained its high-level volatility; but the pace of the market still has not translated into direction. This is partially a consequence of thin liquidity through the end of the summer and into the long, holiday weekend; but the same general affliction for the broader speculative market suggests the unusual calm has deeper fundamental roots. Investor sentiment (and thereby capital markets) has steadily appreciated over the past six months through an evolution of early adoption, an influx of sidelined capital and on prospects for an economic recovery. Yet, just as pessimism overshot reality through the end of the financial crisis; so too can optimism exceed reasonable expectations for returns when the masses are eager to reenter the market and recover wealth lost over the past two years. Sentiment makes for an overwhelming theme and it will very likely decide the ultimate break in the dollar and its subsequent trend. However, these fundamental winds will steadily lose their influence with the markets and the greenback in particular. Ultimately, the degradation of this fundamental link may very well be hastened by the economic prospects for the currency itself. Growth and interest rate forecasts could shift the dollar’s position on the risk spectrum. Though, with speculation of early rate cuts constantly checked and actual expansion elusive, it seems the US will maintain its anti-risk qualities.