Dollar pares advance on late shift toward risk

The greenback was marginally weaker at the close of an extremely volatile session in North American trade on Tuesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) off by just 0.08% on the day. Equity markets underwent a massive late day rally that saw all three indices close higher with the Dow, the S&P, and the NASDAQ surging 1.44%, 2.25%, and 2.95% respectively. Although markets were sharply lower at the open, comments made by Fed Chairman Bernanke and reports that EU Officials were looking for ways to coordinate the recapitalization of struggling banks fueled a substantial rally with risk currencies surging as the dollar came under pressure.

The greenback quickly pared its advance after tagging the 10,130 level in earlier in the session. The index is likely to remain under pressure here for sometime noting support lower at 10,000 and the 23.6% Fibonacci extension taken from the June 8th and December 1st 2010 crests at 9970.

A closer look at the index attests to the sharp late-day sell-off in the dollar, with the index paring all the day’s gains. An RSI break below 50 suggests further downside moves for the greenback with interim support seen at 10,000 backed by the 23.6% Fibonacci retracement taken from August 30th advance at 9960 and 9900. Topside resistance holds at 10,130 with subsequent ceilings eyed at 10,200 and 10,250.

The greenback fell against three of the four component currencies highlighted by a 1.14% decline against the euro on Tuesday. The single currency was bid higher on news that European finance ministers were examining ways to recapitalize financial institutions after a consensus for more action was reached. Although no concrete details have yet been disseminated, the move bodes well for the euro after concerns over an imminent default had driven the currency to near 10-month lows. The yen was the only component to end lower against the dollar with a loss of 0.38% on the session, as demand for safety steadily evaporated throughout North American trade.

Wednesday's economic docket is highlighted by the ADP employment report and the ISM non-manufacturing composite. The September print for ADP is expected to show a gain of 73K private sector jobs, down from the previous read of 91K. Although some have suggested that the ADP stands as a barometer for the more encompassing non-farm payroll report, we note that last month’s read grossly overestimated the data, with NFPs coming in flat with a print of zero growth in August. ISM will be closely eyed with consensus estimates calling for a print of 53 in September, down from a previous read of 53.3. Should the data miss estimates by a substantial amount, the dollar is likely to rally as demand for haven picks up. As it stands however, the dollar is likely to remain under pressure as markets seem to have put in an interim bottom here.

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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