ING has pointed out that the U.S. dollar's strong performance in August was not fully supported by conventional market drivers such as relative rates, equities, and commodity dynamics. Their short-term fair value model shows the dollar as overvalued against all G10 currencies to varying degrees. ING believes that a deterioration in U.S. economic data remains the most plausible trigger for a rapid and substantial dollar correction.

Key Points:

• Dollar Overvaluation: According to ING's short-term fair value model, the dollar is overvalued against all G10 currencies. The overvaluation is moderate against the GBP (<1%) but becomes more significant against Scandinavian currencies (>3%).

• Trigger for Correction: ING asserts that a downturn in U.S. economic data is the most likely catalyst for a correction in the overvalued dollar.

• Potential for Rapid Correction: Should U.S. data deteriorate, the dollar could see a rapid and sizable correction, given its current state of overvaluation.

Trading Recommendations:

• Be Prepared for Volatility: Traders should brace themselves for a potential rapid correction in the dollar, particularly when new U.S. economic data is released.

• Watch U.S. Economic Indicators: Close attention should be paid to upcoming U.S. economic releases, as negative data could be the trigger for a significant USD selloff.

Implications:

For Traders:

• Short USD Positions: Those holding short positions in the USD should be aware that a U.S. data turn could lead to a rapid correction, benefiting their trade strategy.

• Risk Management: Given the likelihood of a rapid correction, risk management strategies should be in place to protect against abrupt moves.

For Policymakers:

• Economic Deterioration Impact: Policymakers should note the sensitive market reaction to economic data and be prepared for currency fluctuations in response to policy announcements or data releases.

Conclusion:

ING suggests that the U.S. dollar is currently overvalued and that its strong performance in August wasn't justified by typical market factors. They propose that the dollar is primed for a correction, which could be triggered by a downturn in U.S. economic data. Given the current overvaluation, this correction could be both rapid and substantial.