Dollar drifts as stock market jitters remain

The greenback was virtually unchanged at the close of North American trade on Tuesday with the Dow Jones FXCM Dollar Index (Ticker: US Dollar) off a mere 0.1% on the session. The lackluster performance comes on the back of weakness in US equities that saw the Dow, the S&P, and the NASDAQ fall 0.67%, 0.97, and 1.24% respectively. Although closing well off their session lows, stocks continue to be weighed down by concerns over domestic growth prospects and new developments in the ongoing sovereign debt saga in Europe.

In a post-meeting press conference on Tuesday, French President Nicolas Sarkozy and German Chancellor Angela Merkel called for a further integration of the Eurozone nations in an effort to create stronger economic ties among member states and return stability to financial markets. The announcement came on the heels of a weaker than expected print on German GDP that fueled concerns that growth in the region’s largest economy may be faltering. And while the implications of such measures have not yet been fully disclosed, markets turned on the euro as equities continued to come off.

The dollar remains in an encompassing descending channel dating back to the November highs, with the index briefly dipping below the key 9455 support level before settling marginally lower on the day. 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 with increased volatility continuing to plague financial markets, the greenback may hold above this key level as haven flows provide support for the world’s reserve currency.

The index continues to straddle the 50% Fibonacci extension taken from the July 12th and August 8th crests at 9460 after failing a topside breech of the descending channel that has held the dollar since the August 10th highs. A downside break sees interim support at the 61.8% extension at 9410 and 9370. A breech above trendline resistance sees subsequent ceilings at the 38.2% extension at 9513, 9580, and 9600.

The dollar outperformed two of the four component currencies, highlighted by a 0.26% advance against the euro which fell on skepticism that European leaders will be able to enact the economic ‘integration’ so adamantly conveyed during Tuesday's press conference. The sterling topped the performance charts with a 0.40% advance against the greenback. The pound continues to grow as an alternate haven play for investors seeking refuge amid economic uncertainty in the region as concerns over a possible swissie-euro peg divert flows away from the franc.

Wednesday's economic docket is relatively quiet with just MBA mortgage applications and producer prices on tap. July producer prices will take center stage with consensus estimates calling for prices to remain unchanged at 7.0% y/y; while core prices (ex food & energy) are seen easing to 2.3% y/y from a previous read of 2.4% y/y. Investors will remain focused on developments out of Europe however, with UK jobless claims, and Eurozone CPI on tap overnight. And with Tuesday's developments, market participants will continue to look for further details into the unprecedented reforms conveyed by Merkel and Sarkozy and their implications for the future of the euro-project.

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

Twitter: @MBForex
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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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