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Speculators increased their bets against the dollar to the highest level since the beginning of November. Remember what happened then? Are the tables about to turn in favor of the dollar and against the Euro?

The weekly report by the CFTC showed that the net short positions against the greenback jumped from 15.06 to 18.2 billion dollars in the past week. And, a similar record was reported for Euro longs:

Net long positions on the euro jumped to 22,901 contracts, the highest since the week ended Nov. 9. Last week, speculators went long the euro for the first time in about two months to the tune of 4,109 contracts.

At the beginning of November, QE2 was announced in the US. Although this was expected, EUR/USD reached a record at 1.4282, AUD/USD made a convincing break above parity and the dollar was dropping everywhere.

But just a few days later, the Irish crisis broke out, and the picture changed dramatically – EUR/USD fell sharply, below 1.30.

The CFTC data is from Tuesday, but published only on Friday. Indeed, Friday’s  deterioration  in the situation in Egypt sent traders to safe haven currencies such as the dollar, Swiss franc and the Japanese yen, and sent them away from the Euro, pound and Aussie. The Canadian dollar was sold on risk aversion, but enjoyed the rise in oil prices, driven by the speculation about the closure of the Suez canal.

But it’s not only the riots in Egypt that support a weaker Euro/Dollar. The European debt crisis is far from over. Greece and Ireland could still default. The loud denial from Greece means that danger is still near. Spain, the Euro-zone’s fourth largest economy, has seen its bond yields rise throughout the week, well before the day of rage in Egypt.

And in the US, recovery is picking up. The economy grew at a pace of 3.2% in the fourth quarter, according to the initial release. While this was slightly below expectations, there are two good reasons for optimism:

  • Job growth: This growth level is sufficient for growth in jobs – 2.5% growth is considered the critical line between job growth and contraction. Unemployment is very painful in the US, and weighing on the economy.
  • Drop in inventories: The components of the growth show that consumer spending rose at the highest level since Q1 2006 and that growth would be much stronger if a companies wouldn’t eat out inventories – a rebuild of inventories will boost GDP in 2011.

All in all, even after the dust in Egypt settles down, the dollar will still have reasons to rise.