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Recent Dollar Dip Marks a Buying Opportunity

NEW YORK ( TheStreet) -- The U.S. dollar has met selling pressure in recent sessions, driven mostly by central bank policy statements that jarred market expectations and partially reversed some of the dominant trends seen so far this summer.

Dovish comments from Federal Reserve Chairman Ben Bernanke suggested that there is no immediate need to start scaling back on quantitative easing programs, and that monetary stimulus could continue even if we see stable recoveries in U.S. economic data. In addition to this, the Bank of Japan (BoJ) completed its July meeting with no additions to its own stimulus programs and offered a generally upbeat outlook for Japan's economy.

These events are not entirely in agreement with the over-riding expectations seen in the market, as the Fed is widely expected to be the first central bank to begin phasing-out its stimulus programs. So, the next question for investors is whether or not these statements and policy decisions are enough to reverse the bullish trend in the U.S. dollar that has been in place over the last five weeks. But most of the evidence suggests this is unlikely, and that, if anything, recent weakness is more the result of profit-taking in long-dollar positions, rather than a genuine expectation that market conditions have changed.

For these reasons, short-term dips in the U.S. dollar should be viewed as buying opportunities.

Steady improvements in labor markets and confident economic assessments from policymakers should bring buyers back into the U.S. dollar, which will continue to look more attractive relative to its most commonly traded counterparts (such as the euro, yen, and Australian dollar). Indications that the Federal Reserve will, in fact, begin cutting back on its monthly purchases of Treasuries and mortgage-backed securities have been voiced by Philadelphia Fed President Charles Plosser, who reiterated the need to start reducing stimulus in September.

The proximity of Plosser's comments to Bernanke's tells us that there are at least dissenting voices in favor of adopting a more hawkish policy stance. This is something that is missing from the Fed's global counterparts, as policymakers in the eurozone, England and Japan have yet to rule out further easing measures.

From a growth standpoint, U.S. GDP forecasts are seen in the neighborhood of 2.7%, and while this might seem sluggish, it is still well above what is expected in other regions of the globe. The combination of these factors will continue to support the U.S. currency into the end of the year, as alternative options for currency investors remain limited.

From an interest rate perspective, it could be argued that the Australian dollar still has advantages for long-term investors. But key risks are seen here as well, with the fate of the Australian currency heavily dependent on the health of the economy in China (the country's largest trading partner).

This week, we will have critical GDP figures out of China, with consensus estimates suggesting an annual growth rate of 7.5%. But recent comments from Chinese finance officials have indicated a willingness to accept slower rates of long-term growth, and there is clear potential for this next week's figures to come in lower than markets anticipate.

Weaker growth in China will weigh on the prospects for Australia's raw materials exports, and this could lead to additional downside extensions in the country's currency.

Taken as a whole, these factors paint a positive picture for the U.S. currency, even with its recent moves to the downside, and unimpressive projections in yearly growth rates. As the rest of the world struggles to catch up, expect the U.S. dollar to be one of the currency markets biggest winners in the third quarter.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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