The greenback snapped a six day losing streak today with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing 0.30% on the session. The gains come on the back of sharp losses in equities that saw the Dow, the S&P 500, and the NASDAQ off by a staggering 1.59%, 2.03%, and 2.65% respectively.
The NASDAQ saw its largest one day decline today since mid-February while the Dow and the S&P are on track to close out the sharpest weekly decline in nearly a year. The sell-off was fueled by the ongoing debate on Capitol Hill which shows no signs of abating as the debt ceiling deadline rapidly approaches. Even if the debt ceiling is raised, at this point, investors see a high risk that the US may still see a downgrade of its debt rating for the first time in the nation’s history. Also weighing on sentiment was an unsettling Fed Beige book report that cited eight of the nation’s 12 Fed districts saw moderating growth. The report followed weaker than expected data early in the session that saw US durable goods orders drop 2.1% in June, erasing a downwardly revised 1.9% gain seen a month earlier.
As noted in yesterday’s USD Trading Today report, the dollar remained supported above the 2010 low at 9369 as traders booked profits on dollar shorts in the face of heightened risk aversion. Again we note significant support rests here as the level is represents a 100% long-term Fibonacci extension taken from the March 4th 2009 and June 8th 2010 crests. The dollar’s run may be short-lived however as policy makers struggle to find common ground in Washington.
An hourly chart sees the dollar briefly breaking below the 9369 level before rebounding off of the 138.2% Fibonacci extension taken from the May 23rd and July 12th crests at 9335. The index pared all the overnight losses to close higher at the 9396 mark with interim support holding at 9369 and the 138.2% Fib extension tested earlier. Topside resistance stands the 100% Fibonacci extension at 9450 with subsequent ceiling eyed higher at 9500 and the 76.4% extension at 9525.
The greenback advanced against all the component currencies save the Aussie, which remained well supported after last night’s stronger-than-expected CPI data saw expectations for interest rate cuts by the RBA ease. The euro saw the steepest decline, falling nearly 1% against the dollar on speculation that Europe’s stability plan will be inadequate to stem the risk of contagion. The yen remained relatively unscathed, sliding a modest 0.12% as the swissie and the yen remained well supported on haven flows.
Tomorrow’s economic docket is highlighted by the weekly jobless claims and pending home sales reports. Claims are expected to taper off slightly while pending homes sales are seen declining by 0.2% m/m after a strong 8.2% m/m advance a month earlier. Investors will remain fixated on Washington however as democrats and republicans continue to wage battle over how to resolve the nation’s soaring deficits. Any developments or consensus on an agreed plan could drastically sway market sentiment with the dollar likely to benefit in the short-run.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.