The dollar is mostly weaker today, with the Euro hitting a new low vs. the greenback, following this weekend's meeting of finance officials from the Group of Seven leading nations. Foreign exchange traders interpreted the lack of any meaningful policy statement from the G-7 ministers in response to recent currency market moves as a signal to carry on selling the U.S. unit.
Traders have become increasingly bearish on the U.S. dollar in recent months, motivated in part by large current account and other structural imbalances, as well as a sizable increase in overseas investments by U.S. investors. Dollar-selling momentum has also fed on itself, triggering a sharp boost in bearish sentiment toward the currency.
Yet, in spite of -- or, perhaps, because of -- the fact that selling the dollar appears to be something of a one-way bet at the moment, it's worth keeping a few things in mind. For a start, the currency markets are prone to emotional extremes that can trigger an abrupt contrarian reversal. More important, perhaps, technical factors often have a far stronger influence on buying and selling patterns than fundamentals such as interest rates.
In that light, if one looks at a long-term chart of the U.S. dollar index, which reflects the currency's value against a basket of six other major currencies, it is apparent that the greenback is nearing levels which have served as major support for at least three decades.
The dollar's proximity to key technical levels shouldn't be the only consideration, of course. Equally relevant is the high degree of bearishness and the rush by individuals and institutions to buy stocks, bonds, and other investments that lie outside our borders. With all of this in mind, prudence suggests it might just be time to rethink an overly negative dollar stance -- and an excessively large weighting in overseas markets.
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