The Dollar is Oversold....

...but may not be due for pullback.

The move this week has been too extreme. When the price of tradeable assets moves this much in such a short time period the sentiment behind the move is almost always overdone. I doubt it is different this time. Today had several catalysts to make the dollar come undone. Oil & gold rallied (but what was the tail and what was the dog?), options expired, and Greenspan and Snow scared all sorts of traders into trading down US assets.

Neither of them said anything new, but that it came from Greenspan so bluntly was not everyday stuff. There are real problems confronting the dollar, the bond market and the stock market. What I think might happen is that the dollar may regain some of the ground lost this week, but I don't think a correction will change the trend. The twin deficits are likely to continue to send the dollar lower but with less violence than we saw this week.

I will either be right or wrong about that last prediction. The more important thing is how to invest around the issue? I don't think this will evolve some sort of market crisis, but it is a possibility. I am overweight foreign equities, foreign bonds, energy stocks, and natural resource stocks with a little bit of gold exposure. Those groups will do well if something extreme occurs and they have been doing well all this time without anything truly bad having happened. Clearly my allocation is not perfect but it is proactive and I know too many managers with their heads in the sand.