DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) is 0.27 percent lower on the day after moving 85 percent of its average true range, and the pullback from the monthly high (9,886) may pick up in the days ahead as market participants see European policy makers taking additional steps to address the sovereign debt crisis. In turn, we may see the index fall back towards the lower Bollinger Band around 9,792, but the outlook for the USD remains fairly bullish as it continues to trade within an upwards trending channel. Once we get the correction out of the way, the greenback should resume the rebound from 9,454, and the reserve currency may trade higher going into the final month of 2011 as the weakening outlook for the global economy bears down on investor confidence.

Indeed, the Federal Open Market Committee policy meeting minutes highlight the biggest event risk for the following week, but holiday trading conditions may produce choppy price action across the major currencies as U.S. traders go offline for the Thanksgiving Holiday. Nevertheless, we expect the FOMC to maintain a dovish tone for monetary policy given the ongoing weakness within the labor market, but the statement could highlight a growing rift within the committee as the fundamental outlook remains clouded with high uncertainty. As Fed officials see the recovery gradually gathering pace over the coming months, some members have talked down speculation for additional monetary support, but central bank Chairman Ben Bernanke may keep the door open to expand the balance sheet further as the debt crisis poses a risk for the banking sector. In turn, dovish comments from the FOMC could reignite speculation for another round of quantitative easing, and the USD may trade heavy next week as market participants weigh the prospects for future policy. As the USD makes another railed run at 9,900, the pullback may turn into a larger correction, but former resistance around the 50.0 percentFibonacci retracement around (9,828) may play as new support as the USD breaks out of the range from earlier this month.

All four components advance against the greenback on Friday, led by a 0.39 percent rally in the Euro, but the rebound in the single-currency could be short-lived as the fundamental outlook for the region remains bleak. Indeed, there were market rumors that theEuropean Central Bank will further expand its nonstandard measures to shore up the economy, but we may see the Governing Council move away from asset purchases as it comes under increased scrutiny. As there appears to be a growing rift within the ECB, President Mario Draghi certainly faces an uphill battle, and the credibility of the central bank may come under pressure as policy makers struggle to meet on common ground. As the fundamental outlook for the euro-area remains bleak, the small rebound in the EUR/USD is likely to be short-lived, and the exchange rate may ultimately threaten the rally from 1.3145 as market participants see the ECB expanding monetary policy further in December.

--- Written by David Song, Currency Analyst

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