BUDDING ANTI-DOLLAR SENTIMENT CREATES IDEAL GROUND FOR RALLY IN THE GREENBACK

US dollar - Weakness in equity index futures even before the opening bell had rung at the New York Stock Exchange on Tuesday was sending the doomsters and nay-sayers wagging their fingers, crying, "I told you so!"

So far earnings that didn't fall as much as was baked in the cake have supported a bull market. But a sudden bout of stage-fright saw investors worry. But before the market closed intra-day losses were almost erased from the big board entirely and investors are looking ahead to a better start on Wednesday.

Of course thanks to so-called "risk-aversion" the price of gold fell largely influenced by a rising dollar. When the market gets anxious and investors fear an economic relapse they buy dollars and they also buy yen. Japan has got the added risk factor of a general election due at the end of August. That's not likely to sit well with investors looking for safety in coming weeks if the stock market does indeed have a secondary bout of fear. In our weekly futures trading service we recommended readers short the Japanese yen this week.

But the dollar's rally cracks open a whole new debate. What is the fate of the dollar in light of recovering economies? Some weeks ago the market got rather hot under the collar about the perceived need for imminent interest rate tightening, although that notion soon cold water poured on it. But in Australia this week the governor of the RBA started talking at a dinner with economists as though he'd had a scotch too many and made noises about taking away perhaps undeserved monetary stimulus administered when the economy perhaps didn't need it.

Before the close the dollar had nevertheless scored a daily victory across the board. The timing couldn't have been better to cause at least some blushes in dealing rooms across some of the world's largest banks. But the neat thing about markets is that they tend to inflict maximum pain on the most amount of people at any given time. Tuesday was no exception. Let's take a tour of recently announced predictions from those that apparently know what's about to happen.

Aussie dollar - A consulting technical analyst at National Australia Bank in Sydney said of his local currency, and you'd think he'd know, that if it could take out a June 3 high at 82.63 against the U.S. dollar it would trade towards 85.50. Sue, we'll take close to two cents on a trade, but couldn't you have told us a month ago mate?

Euro - A technician from Frankfurt at Helaba Landesbank Hessen-Thueringen used the MACD indicator, one of our favorites too, to suggest that the euro is doing just nicely and ought to take out $1.4338 according to the indicator. We've been watching MACD fail and we're concerned about the prospects for a near-term dollar rebound! The euro slumped to $1.4131 Tuesday and now has to start all over again if it's going to make a (rather rapid) new high before July ends on Friday.

Meanwhile "the world's biggest currency trader," UBS says that there are reasons to be cautious on the dollar in August. Risk aversion won't be back for a while and so risk-appetite will see the dollar take a knock. They point to a large number of growing speculative positions selling short the dollar and buying the euro, Swiss franc, Canadian and Aussie dollars as well as the yen.

Morgan Stanley warned clients to ditch the dollar and go long euros, Norwegian krone and the Canadian dollar as the economy improves. The bank is, like the German guy looking for acceleration of the euro above $1.4330. Dollar weakness, they warn, might gain momentum.

British Pound - Standard Chartered Bank is predicting further gains for the pound from $1.65 to $1.75 on account of a global recovery and a currently below par pound.

When we launched our Global Resources Alert at the beginning of July we wrote about the prospects for both interest and exchange rates. We gave our top pair of currency recommendations at the time based on our long-held beliefs. Those positions are showing open average gains of 5% as we write and closing in on targets, which might just be reached on another wave of risk appetite.

The risks of a counter rally in the dollar appear to be building as more and more investors are urged to stand on one side of the ship. Maybe we saw some of this in Tuesday's session. As more and more investors become frustrated waiting for the so-called inevitable demise of the dollar they throw in their hand and put upward pressure on the dollar, giving more investors reason to follow-suit. That's when markets become interesting and allow you to buy weakness and sell strength. 

The Supreme Council of the Secret Order of Jurojin