DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) is 0.12 percent higher from the open after moving 78 percent of its average true range, and the rebound from 9,773 may gather pace over the next 24-hours of trading as the 30-minute relative strength index bounces back from a low of 33. In turn, we may see the USD work its way back towards the upper Bollinger Band around 9,854, and the greenback should continue to retrace the sharp reversal from 10,134 as the weakening outlook for the global economy bears down on market sentiment. However, the index may fall back towards the 9,700 before we get another push to the upside as the dollar remains confined with an upward trending channel.

As the USD finally clears the 50.0 percentFibonacci retracement around 9,828, we should see the rebound from 9,454 gather pace over the coming days, and the bullish sentiment underlying the greenback may gather pace as market participants scale back expectations for another round of quantitative easing. Former Fed Vice-Chairman Donald Kohn said Operation Twist’ has been successful in lowering rates, and expects the Fed to ‘watch and wait’ as policy makers see private sector activity picking up over the coming months. In turn, we may see Fed Chairman Ben Bernanke soften his dovish tone for monetary policy, and the central bank may see scope to start normalizing monetary in 2012 as it takes extraordinary steps to encourage a sustainable recovery. However, the central bank head may keep the door open for QE3 as the slowdown in the global economy dampens the prospects for future growth, and we may see the Fed take additional steps to stimulate the ailing economy s it maintains its dual mandate to ensure price stability while fostering full employment.

Two of the four components weakened against the greenback on Thursday, led by a 0.28 percent decline in the Australian dollar, while the Euro advanced 0.26 percent as Greece appointed former European Central Bank board member Lucas Papademos as the Prime Minister. As the new leadership helps to prop up investor confidence, the relief rally in the EUR/USD may carry into the end of the week, but the fundamental outlook for the euro-area remains pretty bleak as the EU sees the region facing a‘deep and prolonged recession.’ As the slowing recovery dampens the risk for inflation, there is likely to be an increased reliance on the ECB to keep the economy afloat, and the Governing Council may have little choice but to delay its exit strategy further as the heightening risk for contagion continues to dampen the outlook for the region. However, as ECB board memberKlaas Knotargues that ‘not much more can be expected’ from the central bank,it seems as though the committee will maintain its current policy going into the following year, and the central bank may endorse a wait-and-see approach throughout the first-quarter of 2012 as the governments operating under the single-currency pledge to take the necessary steps to address the sovereign debt crisis.

--- Written by David Song, Currency Analyst

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