U.S. dollar rally persists, but advance at risk

The greenback advanced for the second consecutive day in North American trade on Tuesday with the Dow Jones FXCM Dollar Index surging 1.09% on the session. As noted in Monday's USD Trading report, renewed European debt concerns have continued to weigh on market sentiment after Greek Prime Minister Papandreou called for a referendum on the newly proposed rescue package. European markets plummeted as dissention among Greek officials fueled fears that the government may collapse as multiple socialist parliament members resigned, making it increasingly difficult for the prime minister to win a majority vote. Weakness in equity markets carried over into the US session with the Dow, the S&P, and the NASDAQ plummeting 2.48%, 2.79%, and 2.89% respectively. Classic haven flows fueled another substantial rally in the greenback as treasuries surged and yields came off. Looking ahead, dollar price action will be increasingly dictated by market sentiment with key economic data still on tap for the remainder of the week.

The dollar broke above the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745 before settling around the 9755 mark. As market sentiment continues to deteriorate, look for the greenback to the chief beneficiary of haven flows as yen advances are likely to be capped after Sunday’s Japanese intervention. Note that daily relative strength broke above interim RSI resistance at the 44-level and suggests further gains may be likely for the dollar.

An hourly chart shows the index breaking breaching the 50% Fibonacci retracement taken from the August 1st advance at 9730 before losing steam just ahead of the 9800-mark. Interim support is eyed at 9730 backed by 9700 and the 61.8% retracement at 9633. Topside targets are held at 9800 backed by the 38.2% retracement at 9825, and 9850.

The greenback advanced against all four component currencies highlighted by a 1.76% advance against the Australian dollar which moved 153% of its daily average true range. As noted in this morning’s Winners / Losers report, the Aussie suffered substantial losses overnight after the RBA cut interest rates by 25 basis points to 4.50% and concerns mounted regarding the situation now unfolding in Greece. The yen was the top performer of the lot, sliding just 0.23% amid a massive run-up in the dollar. The USD/JPY continues to hold its recent range after the Japanese Finance Ministry intervened on Sunday to stem the currency’s rapid appreciation.

Wednesday's economic docket is highlighted by ADP employment report and the much anticipated FOMC rate decision and subsequent press conference. Private sector employment is expected to have added 100K jobs last month, up from a previous gain of 91K. Traders will be closely eyeing the report ahead of Friday’s more encompassing non-farm payroll report where consensus estimate are calling for the addition of 95K jobs. Taking center stage tomorrow will be the FOMC interest rate decision. Although the central bank has already pledged to keep interest rates at record lows until mid-2013, investors will be lending a keen ear to remarks made by Fed Chairman Ben Bernanke at the quarterly press conference for clues as to future policy changes. More notably, investors will be specifically looking for any mentions of possible third round of quantitative easing. Should Bernanke discuss further easing measures, look for the dollar to come under pressure with stocks likely to rally on the news. Implications for the dollar tomorrow are profound as the future of the greenback hangs in the balance.

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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