Short-Term Dollar Rally Likely

NEW YORK (TheStreet) -- The dollar is poised for a short-term bounce as the sell-off in anticipation of quantitative easing may have been overdone and European debt problems resurface.

The dollar index has shed 8% since early July, while stocks have gained 17%. Expectations of quantitative easing have dominated the dollar trade, with fears of the eurozone's debt problems retreating to the background.

"The dollar [selloff] is overdone here. We are not that far away from the March 2009 lows for the dollar," said Ralph Fogel of Fogel Neale Partners. "In the short-term it could rally....5% in the next four to six weeks is a very good possibility."

Over a longer period, Fogel expects continued weakness in the greenback unless the U.S. moves to significantly cut its fiscal spending and debt burden. Other analysts also expect the dollar downtrend to continue after a shallow rally, as fundamentals weaken in favor of other currency markets in Asia and emerging markets.

"In the immediate term there is a strong possibility of the dollar rallying," said Adrian Day, founder of Adrian Day Asset Management, that manages money for clients in global and resource markets. "But the rally will not be based on fundamentals, but purely on market factors. The dollar has declined too far."

James Dailey of Team Asset Management, however, believes dollar movements may be more nuanced in the future, appreciating against certain currencies while weakening against others. In particular, the dollar is likely to strengthen against the euro, as debt problems in the Ireland and Greece rear their ugly head once again.

"All the euphoria about assets going up [due to quantitative easing] has overlooked the problems in Europe," he told TheStreet on Tuesday, as Irish debt problems resurfaced and drove the dollar higher. "The euro could go down a good bit lower versus the dollar. The ECB (European Central Bank) may end up doing their own monetization of debt."

A short-term rally of the dollar against the euro could mean a correction for stocks going by recent trends. "For the past few years, investors and traders appear to have developed a Pavlovian response to the US dollar/euro exchange rate. If the US dollar rallies versus the euro, investors/traders sell risk assets such as stocks and commodities, while if the US dollar declines versus the euro they do the opposite," Dailey notes in his blog post.