Byron Wien and Gary Shilling aren’t the only ones betting on a dollar rally in 2009. A recent research piece from Morgan Stanley’s FX team says the dollar rally could continue and rally as much as 10% as it appears attractive compared to most other G4 currencies. Based on Morgan Stanley’s valuation metrics the dollar is now substantially below its fair value:
Based on this work, they now believe the dollar short trade is extremely crowded and the currency is oversold. These factors reduce the potential for a further near-term decline:
Their FX team says the U.S. economy is also fairly attractive compared to that of the G4:
We project US growth to handily outpace that of its G4 peers and the dollar looks primed for a relief rally.
The deeply undervalued dollar and potential for upside economic surprise makes the currency ripe for a sharp rebound. Morgan’s FX team believes the dollar could rally as much as 10%:
We forecast the USD to rally 10% against other developed market currencies in 2010, with most of these gains concentrated against other G4 currencies. In that vein, two of our favored strategic trades for 2010 are short EUR/USD (target 1.32) and long USD/JPY (target 109).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.