DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) remains 0.08 percent higher from the open after moving 65 percent of its average true range, and the reserve currency may make another run at 9,800 as the 30-minute relative strength index bounces back from a low of 36. As the International Monetary Fund casts a dour outlook for the world economy, the slowdown in global growth is likely to weigh on risk-taking behavior, and we may finally see the USD breakout of its narrow range as it benefits from safe-haven flows. However, hopes surrounding the EU meeting in Brussels may keep market sentiment afloat as European policy makers increase their effort to restore investor confidence, and the developments coming out of the euro-area is likely to influence the currency market as investors see the group taking additional steps to shore up the real economy.

As the USD maintains the narrow range carried over from the previous week, we may see the greenback consolidate throughout the North American trade, but we may see the rebound from 9,454 gather pace in the days ahead as European policy makers struggle to stem the risk for contagion. However, as the greenback continues to find resistance around 9,800, the USD could be carving out a near-term top in November, and the dollar may trade heavy in the days ahead as the Federal Reserve maintain a dovish outlook for monetary policy. As Fed Chairman Ben Bernanke keeps the door open to expand the balance sheet further, speculation for another round of quantitative easing continues to dampen the outlook for the greenback, and market participants may continue to diversify away from the USD as the central bank curbs its forecast for growth and inflation.

Three of the four components weakened against the greenback, led by a 0.48 percent decline in the Australian dollar, while the Japanese Yen advanced 0.22 percent as market participants scaled back their appetite for risk. As the USD/JPY continues to retrace the market reaction to the Yen intervention, Japan’s Ministry of Finance may step up its efforts to dampen demands for the low-yielding currency, but it seems as though the Bank of Japan will stay out of the currency market as the central bank looks at alternative measures to weaken the Yen. It seems as though the BoJ will resort to expanding its nonstandard measures to bring down the Yen as it expands its asset purchases, and the central bank looks poised to carry its easing cycle into the following year as the marked appreciation in the exchange rate paired with the slowdown in global trade dampens the prospects for an export-led recovery. However, as risk trends continue to dictate price action in the currency market, any efforts to tame the Yen are likely to be short-lived, and the low-yielding currency may appreciate further over the near-term as the heightening uncertainties surrounding the global economy bears down on trader sentiment.

--- Written by David Song, Currency Analyst

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