DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) is 0.64 percent lower from the open after moving 140 percent of its average true range, and the greenback may trade heavy throughout the day as market participants increase their appetite for risk. As the USD continues to find resistance around 9,800, the pullback from the overnight high (9,792) may gather pace going into the middle of the week, but comments from the Federal Reserve are likely to heavily influence the reserve currency as market participants weigh the outlook for monetary policy. As the FOMC rate decision takes center stage, we should see market volatility thin ahead of the announcement, but the market reaction may not be clear cut as Fed Chairman Ben Bernanke is scheduled to hold the quarterly press conference at 18:15 GMT.

Indeed, the policy statement accompanying the rate decision is likely to move the currency market, and the rebound in risk sentiment may taper off should the Fed turn increasingly cautious towards the economy. However, as the recent developments coming out of the U.S. encourage an improved outlook for future growth, the FOMC may strike a positive tone for the world’s largest economy, and we may see the central bank soften its dovish pitch for monetary policy as Fed officials expect the recovery to gather pace over the coming months. Should the committee talk down speculation for QE3, the developments should help to prop up the reserve currency, and the index should resume the rebound from 9,454 as the fundamental outlook for the U.S. improves. As a result, we may see the gauge climb back above 9,800 later today, and the dollar should continue to retrace the sharp decline from the previous month as market participants scale back expectations for additional monetary support.

All four components gained ground against the greenback, led by a 0.72% advance in the Euro, but the single-currency is likely to face headwinds over the remainder of the week as fears surrounding the sovereign debt crisis intensifies. At the same time, the European Central Bank interest rate decision may weigh on the exchange rate as we expect the Governing Council to cast a weakened outlook for growth and inflation, and the board may take additional steps to shore up the ailing economy in an effort to stem the risk of a double-dip recession. However, as Mario Draghi takes the helm, we may see the ECB refrain from saying anything new, and market participants may show a muted reaction to the rate decision should the central bank reiterate the policy statement from the previous month.

--- Written by David Song, Currency Analyst

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