The greenback was weaker at the close of trade in North America on Monday with the Dow Jones FXCM Dollar Index(Ticker: USDollar) sliding 0.47% on the session. Equity markets continued their advance with the Dow, the S&P, and the NASDAQ climbing 0.89%, 1.29%, and 2.35% respectively. Strong corporate earnings and, in our opinion, unfounded optimism regarding the proposed European rescue package continued to prop up the risk trade with higher yielding, growth-backed assets advancing across the board. However with expectations for a “euro-fix” propping up markets for more than a week now, officials will need to ensure the proposed crisis package will be ambitious enough to satisfy nervous investors.
The index broke below the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745 on Friday as hopes for substantial progress from the EU leaders over the weekend propped up investor appetite. The dollar’s recent decline gathered pace today as more talks of a possible QE3 weighed with the index which broke below the 100-day moving average at 9633 before finding support at former long-term trendline resistance. The 50% Fibonacci extension at 9563 is now key for the greenback, with a break here risking substantial losses. Note that a sharply sloped daily relative strength suggests further dollar losses after breaking below the 44 support level.
A closer look at the index shows the dollar breaking below the 61.8% Fibonacci retracement taken from the August 1st advance at 9633 before finding solace just above interim support at 9585. A break here sees subsequent floors at the 76.4% retracement at 9515 and 9450. Topside resistance now holds at former support backed by 9700, the 50% retracement at 9730 and 9760.
The greenback fell against all four component currencies highlighted by a 0.96% decline against the Australian dollar. The reserve currency continues to come under increasing pressure as talks of possible further quantitative easing measures from the Fed weigh on the greenback’s outlook. Accordingly the dollar has fallen against all its major counterparts with the aussie acting as the chief beneficiary of the recent risk-on environment. The euro saw the smallest gains of the lot, advancing just 0.20% ahead of Wednesday’s EU summit where officials are planning to announce fresh plans to contain the debt crisis which has continued to weigh on global markets. As we noted in today’s Winners/Losers Report, risk to the euro remain heavily weighted to the downside as expectations for a substantial aid package for the region continue to climb.
Tuesday's economic docket is highlighted by the October consumer confidence report with consensus estimates calling for a print of 46.0, up from a previous read of 45.4. A strong print has the capacity to further fuel the recent rally as expectations for improved consumer spending take root. Although the single greatest risk to broader market sentiment remains developments out of the Euro zone, further talk of QE could greatly impact the dollar’s performance as the implementation of additional dollar diluting measures could lessen the greenback’s appeal as a haven.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.