There is a growing consensus that overwhelmingly negative investor sentiment concerning the dollar, combined with the media’s wide-spread coverage of its decline, are contrarian indicators that could presage a surprise dollar rally in 2005.

However, if the consensus expects a surprise, how can one occur? How can everyone be bullish on the theory that everyone else is bearish?

As Yoggi Berra once said “No one goes there anymore, it’s always too crowded.” The reality is that the quick reversal of sentiment on the dollar is itself a bearish indicator, and is typical behavior in a bear market. Despite the dollar’s recent strength, and improved sentiment, expect renewed weakness as the year progresses.

While it may have been true that short-term dollar sentiment did get a bid too negative, which recent action has helped correct, long term
sentiment never became negative enough. Surprisingly few dollar bears predict an outright collapse, and even fewer regard its decline as being negative for the U.S. In addition, though many have acknowledged the presence of an oncoming train, few have bothered to step out of its way.

The most likely outcome for the dollar will confound both bulls and bears alike, as the extent of its decline and the severity of the damage inflicted on the U.S. economy and its financial markets, prove just about everyone wrong.

Also, recent technical action indicates that 2005 could well be the year in which the stock market bear comes out of hibernation, and extends its territory to include the bond and real estate markets as well. Pronounced weakness in U.S. asset prices combined with rising interest rates would significantly impair consumer spending, substantially undermine corporate earnings, and greatly reduce U.S. GDP. A U.S. economy headed for recession just as inflation is getting out of control, is hardly an environment conducive to a meaningful dollar rally.