DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) is 0.17 percent lower from the open after moving 56 percent of its average true range, and the greenback may consolidate further over the remainder of the week as there appears to be a bearish divergence in the 30-minute relative strength index. As the economic docket remains fairly light for Friday, risk trends should continue to drive price action over the next 24-hours of trading, and the pullback from the fresh monthly high (9,886) may gather pace should we see market participants further increase their appetite for yields. In turn, the index may test former resistance around 9,750 for near-term support, but we may see the USD gain ground in the following week as it maintains the upward trending channel from earlier this month.

Indeed, the positive developments coming out of the world’s largest economy has helped to prop up market sentiment on Thursday, but the rebound in risk appetite could be short-lived as the ongoing turmoil in the global financial system continues to bear down on investor confidence. As the International Monetary Fund calls for ‘broad political support’ to release the next tranche of Greece’s bailout package, heightening fears surrounding the sovereign debt crisis could spark increased demands for the reserve currency, and the heightening risk for contagion may spur another flight to safety as the political shift in Europe comes under increased scrutiny. However, the failed run at 9,900 could lead to short-term correction in the USD, and the greenback may have carved out a near-term top this week as it struggles to hold above the 50.0 percentFibonacci retracement around 9,828.

Three of the four components advanced against the greenback, led by a 0.45 percent advance in the Euro, but the relief rally in the single-currency could be short-lived as European policy makers struggle to meet on common ground. Indeed, the Institute of International Finance encourage the European Central Bank to play an ‘active role’ in addressing the debt crisis, and said that the group should take additional steps to balance public finances as market participants are not ‘fully convinced’ by the efforts taken thus far. As the governments operating the fixed-exchange rate system become increasingly reliant on the ECB, the central bank may continue to scale back the rate hikes from earlier this year, and the Governing Council may also look to expand its nonstandard measures as heightening borrowing costs raises the risk for contagion. In turn, the short-term bias for the Euro remains bearish, and we may see the EUR/USD ultimately threaten the rebound from 1.3145 as the fundamental outlook for the region turns increasingly bleak.

--- Written by David Song, Currency Analyst

To contact David, e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Join us to discuss the outlook for the major currencies on the DailyFX Forums