Already we’ve seen a little profit taking this morning after the market opened with an initial rally of 50 odd points, but at the time of writing the market’s rejected the highs and we’re back around 5255. Despite mildly disappointing bottom line figures from Goldman and Citigroup yesterday this did not perturb investors who rushed to buy US stocks driving Wall Street higher in the last hour of trading. The rally was commodity led and this morning the gainers are the usual suspects such as miners and energy companies however the ground they’re making is modest.

The talk of the moment is the dollar with calls for it to capitulate to new lows. Its position as the world’s reserve currency is being put to the test but one gets the feeling that this is all stuff we’ve seen before. Only a couple of years ago interest rates were much higher in other areas such as the UK, eurozone when compared to the US and the carry trade (where investors were selling low yielding currencies such as the dollar and yen to buy higher yielding currencies) was well under way, driving the dollar lower. This time round the love loss cannot be contributed to the carry trade but the dire situation with the US budget deficit.

There’s no question that the evidence is there. Some two thirds of all central bank reserves now go into euros or yen, a flow that previously would have seen these reserves go straight into the dollar. On top of this the Chinese used to buy up some three quarters of US Treasury bond issuance, which is not happening today. Sentiment is so dollar negative at the moment that the market is almost over reacting and often you get financial markets moving too far when moves of such magnitude take place.

There are still trillions and trillions of countries reserves tied up in dollars and to suddenly dump the dollar and shift into another currency would be a very costly move. Then there’s the issue with which currency to buy. The euro is the most obvious candidate but it too has its structural problems with many of the member states suffering from this recession and running just as bad budget deficits as the US.

So just when the headlines are full of doom and gloom for the dollar is probably the time to start buying them, when sentiment is SO negative and the last couple of days has already seen a small bounce in the dollar. Sometimes it pays to go against the herd and I remember back in February being in a TV studio talking about the FTSE when the atmosphere was terrible due to the plunging stock market. Day after day saw red figures across the board and it almost felt like Armageddon but that’s precisely when the equity market turned and it hasn’t looked back since.

There are so many short dollar positions that have built up in the last few months that any squeeze could see the greenback stage a mini recovery.

Quite a FX focused comment today! Equity markets are pausing for breath and whilst the trend is unquestionably up, some investors are treading with caution. The FTSE is still a little tentative just below the 5300 level after its strong bounce off the 5000 level and it feels like investors have gone home for an early week end. There’s little in the way of economic data with nothing out from the UK and eurozone and a little bit from the US in the form of Industrial Production and Michigan Confidence figures.