Sizemore Capital Allocation Update: Close Short Position in the Euro

In light of the recent strength in the euro – which we view as unwarranted given the recessionary conditions in the Eurozone – we feel that a short position in the euro is appropriate. The dollar index is currently not far from its all-time lows. Given the extreme, almost universal bearishness towards the dollar (trader sentiment on the dollar index reached a low of 3% on August 3, 2009, according to Jake Bernstein) we feel that going long the dollar / short the euro makes sense from a contrarian perspective. Having visited Europe ourselves last month, we simply cannot find any economic justification for the current exchange rate. It is our belief that the dollar weakness / euro strength is primarily a result of the negative comments by China and Russia earlier in 2009 – in which both expressed an interest in ending the dollar’s role as the world’s reserve currency – and investor unease about the record US budget deficit, which is viewed by many as irresponsible. While we understand the bearish case against the dollar and are even somewhat sympathetic to the views, we feel that the market has mispriced the euro in response. Yes, the dollar is “bad,” but is the euro fundamentally better? We would say no. Furthermore, the US current account deficit has been shrinking since the onset of the crisis, partially neutralizing one of the most often cited reasons for the dollar’s weakness.