Last week I pointed out how the bearish sentiment toward the dollar had reached its most bearish level since 2007. When bearish sentiment toward the dollar is high, it stands to reason that bullish sentiment toward some other currencies would be high.
In the current scenario, it is the euro that is hitting extremely bullish readings.
The Commitment of Traders report from last week shows that large speculators have a net long position of over 60,000 contracts. The last time the large speculators were holding more than 50,000 contracts long on the euro was in October 2009.
Right after the bullish sentiment on the euro peaked, the euro itself peaked at the exchange rate of $1.50. The euro fell from November 2009 until May of 2010 and the bottom came when the exchange rate reached $1.19.
I look for the dollar to rally against the euro and other currencies over the next few months. Should this rally take place, it will have an adverse impact on gold and oil as the futures trade in dollars.
In fact, a good portion of the rally in oil and gold can be attributed to the falling dollar.
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