Where is the US$ going?

The US Dollar (USD) has started rallying last week (Aug. 3-7) and will continue strengthening against most currencies for 'a bit' before it heads back lower.

Looking at some correlations (last five months on a daily basis):

USD/ Euro and S&P 500 Index -94%
Brit. Pound/ USD and S&P 500 Index -77%
Canadian $/ USD and S&P 500 Index +71%

source: Bloomberg

In other words, as we have all observed since the bottoming out of equity markets worldwide in March 2009, the USD gets weaker as stocks rise. But now what?

1- The DXY Index (the value of the USD against 6 currencies) is at 78, down 12-13% in five months, appears oversold so we target a bounce of 5-7%, based on a reversion to the mean scenario.

2- The Euro is struggling so at 1.42 we think it moves lower to 1.38.

3- The Canadian $ and Aussie $ have done well on the recovery of commodity prices (in USD term of course) but appear ahead of the 'game'.

4- Net short interest on USD futures and options is critically high which indicates that from a 'contrarian' persective too many people are USD bearish.

In conclusion, the USD will rally before it collapses... for the reasons we all know.