Dollar losses steepen as equities rebound

The greenback fell against most of its major counterparts for a third consecutive day with the Dow Jones FXCM Dollar Index (Ticker: US Dollar) plummeting 0.92% on the session. The losses come on the heels of a strong performance in US markets as equities pared the massive losses sustained during last week’s volatile trade, with the Dow, the S&P, and the NASDAQ surging 1.9%, 2.18%, and 1.88% respectively. Despite the gains seen over the last three sessions, all three major indices are still significantly lower for August and remain on track for the worst months since May of 2010.
The dollar remains in an encompassing descending channel dating back to the November highs, with the index closing below the 20-day moving average at 9460. A break of key support at 9455 risks further losses for the greenback with longer term targets seen at the April and July lows at 9330. However much of the dollar’s price action will be dictated by broader market sentiment as trader go on the hunt for yields. And with the Fed’s pledge to keep interest rates at record lows through mid 2013, the dollar will continue to suffer so long as risk appetite remains well buoyed.

The index broke below interim support at the 38.2% Fibonacci extension taken from the July 12th and August 8th crests at 9515 before finding solace at the 50% extension at 9460. Price action continues to straddle this level, noting subsequent floors at 9440, the 61.8% extension at 9410, and 9370. Topside resistance is eyed back at the 38.2% extension backed by 9580 and 9600. Hourly relative strength suggests the greenback may be oversold here, with the index likely to see a brief respite in overnight trade.

The dollar fell against all the component currencies save the yen, which fell 0.19% on the session. Improved risk appetite saw traders continue to jettison so called ‘safety’ assets in favor of higher yielding currencies like the aussie which surged 1.47% against the greenback. The euro also went on the offensive, advancing 1.38% on investor optimism that officials will be able to come up with a credible plan to stem the threat of further debt contagion across the periphery nations. French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet tomorrow to discuss the ongoing sovereign debt crisis that continues to threaten stability in the Eurozone region.

Traders will be eyeing tomorrow’s economic docket with July housing starts, building permits, and industrial production data on tap. Housing data is expected to show further weakness with July starts and permits seen contracting by 4.6% m/m and 1.9% m/m respectively. Industrial production data later in the day may provide some relief with consensus estimates calling for a print of 0.4%, up from a previous read of 0.2% in June. Despite the recent rally in risk, market participants remain poised as concerns that the economic recovery may be faltering continue to take root. Subsequently the dollar may continue to consolidate as investors remain wary ahead of this week’s economic docket, with a turn in risk likely to fuel haven flows into the world’s reserve currency.

About the Author
Michael Boutros Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.
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