By Chris Gaffney, CFA,
www.everbank.com

After steadily rising for months, the buck started its freefall two weeks ago. This massive reversal left Forex traders asking if the buck has finally turned the corner.

But hold on. It now looks like the dollar rally isn’t quite done yet – at least in the short-term. In fact, the currencies took a breather overnight as the dollar bounced back up.

At the same time, the euro is also strangely holding strong. When we left the office last night, the euro was still holding above US$1.42, but the single unit dropped three cents overnight and is now hovering around the US$1.39 level. 

This euro drop was to be expected, and it serves as an excellent opportunity for investors who were afraid they had missed out on getting back into the currency market. 

Up, Down, Now Up Again – But Why?

I have searched the news wires this morning, and I just can’t find any good reasons for the dollar's bounce other than the dollar had simply fallen too hard, too fast. 

One my fellow traders and I were talking about this yesterday morning, as we stared at the trading screens in amazement. The dollar's move down over the past two weeks was even faster than the move up earlier this year.

My colleague, Chuck had warned readers all during the dollar rally that the strength was only temporary, but the reversal was just too quick. This move back up is healthy for the markets, and will allow investors another opportunity to move back in.

Also, Chuck is still predicting that the dollar strength will hold as long as the contagion from the credit crisis remains in the markets. This means the dollar will be on a rollercoaster for a few months more until Fed officials finally manage to unclog the credit markets.