DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) remains 0.48 percent higher from the open after moving 57 percent of its average true range, and the greenback looks poised to test the monthly high (9,856) as it benefits from safe-haven flows. However, the USD looks poised for a short-term correction as the 30-minute relative strength index continues to hold below 70, and the dollar may give back the rally from earlier this week should we see investor confidence firm up. In turn, the USD may work its way back towards the lower Bollinger Band around 9,776, but we should see the gauge maintain the upward trending channel from earlier this month as the heightening risk for contagion continues to bear down in risk-taking behavior.

As the USD fails to push back above the 50.0 percentFibonacci retracement around 9,828, we may see a correction pan out later this week, which could open the door for another test of the 38.2 percent Fib around 9,708. Nevertheless, recent comments fromDallas Fed President Richard Fisher suggest that the FOMC will carry its current policy into 2012, and we may see the central bank continue to talk down speculation for another round of quantitative easing as the economic recovery gradually gathers pace. As market participants scale back expectations for QE3, the developments should help to prop up the USD, and the greenback may extend the rebound from 9,454 as the fundamental outlook for the world’s largest economy improves. On the other hand, FOMC board member Charles Evens struck a rather dovish tone and encouraged the central bank to ease policy further as the ‘economy needs more accommodation.’ The growing rift within the Fed certainly make it increasingly difficult for Chairman Ben Bernanke to push for more easing, and the central bank may endorse a wait-and-see approach during the first-quarter of 2012 as policy makers aim to balance the risks for the region.

Three of the four components continued to weakened against the greenback, led by a 0.89 percent decline in the Euro, and we are likely to see the single currency face additional headwinds over the near-term as the heightening risk for continues to bear down on investor confidence. As the yield tied to Italy’s government debt threatens the 7 percent, the ongoing turmoil in the European financial system is likely to weigh on the exchange rate, but we will need to keep a close eye on the 50.0 percent Fib retracement from the 2009 high to the 2010 low around 1.3500 as it holds up as near-term support. However, a break to the downside would derail the rebound from 1.3145, and the single currency may trade heavy over the remainder of the year as market participants see the European Central Bank expanding monetary policy further. However, there appears to be dissenting views within the Governing Council as the ECB maintains its one and only mandate to ensure price stability, and central bank President Mario Draghi certainly faces an uphill battle as the region is expected to face a ‘mild recession’ over the coming months.

--- Written by David Song, Currency Analyst

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