Did the U.S. dollar bottom on Thanksgiving? Since then, the greenback is up nearly 5% in response to sovereign credit fears, beginning with Dubai and then spreading to Greece. We have been arguing that the “short dollar, long everything else” trade is among the most crowded we’ve ever seen, and that the near term threat of deflation could cause a bullish reversal in the dollar. Dubai and Greece are proof that the global credit crisis is still unfolding with deflationary impacts as a result. In response to this new dollar strength, risky assets, particularly commodities, have endured swift corrections. Examples: gold is down nearly $130 from its December 3rd high; crude oil is off 10%; emerging markets are down nearly 5%. U.S. equities, surprisingly, continue to show impressive strength, even with today’s selloff. However, the S&P 500 has been stuck in a narrow range near the 1100 level for over a month, despite recent economic data that continues to support recovery.

Does Thursday’s market action – higher dollar, lower risky assets – signal a major change? Only time will tell, and since the holiday season is upon us, we will likely have to wait until the first of the year to gain confidence in any trend change. In the meantime, we recommend a cautious approach through year end…and the purchase of more dollar exposure on weakness.

U.S. Dollar

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

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