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USD - Groggy but Not Knocked Out
Recommendation

We recommend investors to keep cool with respect to the future value of the dollar
The dollar is shaken but not knocked out at the moment. Instead it is bottoming out against EUR and DKK
Even if the much-feared slowdown in growth in the US materialises, the dollar will win the battle, when the turbulence has settled down
The market is reckoning without a host
The air is thick with dollar pessimism these hours and days. Everybody is falling over each other (we mention no names) to list all the troubles which will inevitably end up with a new major weakening of the hard-hit dollar. But - and there is a major but - when all those prophets of doom will announce their judgement. They simply fail to see the historical fact that the dollar is and remains anti-cyclical. In other words, they are about to reckon without a host, even if they should prove right about their anticipations that the American economy is quickly heading south with resultant declining growth.

Market participants already expect the Fed to lower interest rates three times over the next 12 months, which has been one of the major reasons for the latest sales pressure on the dollar. But if the Fed decides to use the interest-rate weapon to ensure growth in the US - we do not expect so - but if so, history shows (e.g. in 1998 and 2001) that the dollardoes not weaken sharply as expected by market participants. Instead, the dollar turns around with a resultant nice strengthening. At first this is in conflict with good logic, but at a closer look it is quite evident. First and foremost, an economic slowdown in the US will force many American investors to withdraw many of their (very huge at the moment) foreign investments in order to cover the economic gaps, which means that the Americans themselves contribute to strengthening their currency through simple repatriation. Furthermore, a sharp slowdown in American growth will lead to a lower trade-balance deficit, which will imply a lower sales pressure on the dollar. Thirdly, it is very important that the dollar is and remains the No. 1 reserve currency in the world, notwithstanding the much-mentioned economic weaknesses. During periods of turbulence in the global financial markets, many market participants choose - whatever imbalances and interest-rate differentials - to invest remaining funds in the American dollar.

Those who currently have a bearish view on the American economy and not least the dollar should therefore be very cautious to neglect history and the anti-cyclical status of the dollar. The dollar is taking a beating right now, but as we see it, it will not be counted out!