For Rallying Dollar, the Race Looks Run

The dollar has proven this year that it can rally farther and for longer than all but the most contrarian observers believed possible. But with the greenback up 6.5% year to date vs. a basket of other major currencies, and trading near a seven-month high vs. the euro on Friday, the rally is looking a little long in the tooth.

"The easy money's been made," said David Greenwald, one of the dollar bulls cited here in mid-March and a partner at Scalene Partners, a currency-focused hedge fund with over $100 million under management. "I'm not as gung-ho to be long the dollar from here."

Greenwald is far from bearish and thinks "it's not unreasonable" to think the euro could retest the $1.20 level over the course of the summer -- potentially sooner if voters in France and/or Holland reject forthcoming referendums regarding the adoption of the European Union constitution. Still, he views the $1.2430 to $1.2530 range as "meaningful support" for the single currency, which was trading at $1.2564 late Friday in New York.

EU referendums are but one wild card for currencies, perhaps the most difficult asset class to handicap. And there are a lot of factors working in the dollar's favor these days, most notably Europe's sluggish growth and the Federal Reserve's tightening campaign, which has made shorting the dollar far less attractive to speculators as overnight lending rates have risen. Still, the so-called twin deficits remain long-term concerns to currency traders; short-term, there is the seemingly rapidly approaching showdown over China's currency regime.

To recap, the Treasury Department last week effectively demanded that China widen the renminbi's trading band by October or risk being branded a "manipulator." Such a designation would likely be accompanied by trade sanctions and/or passage of the Schumer-Graham Bill that would impose an across-the-board tariff of 27.5% on Chinese imports.