Dollar drifts as traders eye Greece, Italy

The greenback was marginally lower at the close of North American trade on Monday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) sliding 0.08% on the session. Equity markets pared early losses throughout the day with the Dow, the S&P, and the NASDAQ advancing 0.71%, 0.63%, and 0.34% respectively. Markets seem to lack conviction however as the advance in stocks was not accompanied by strength in higher yielding assets and currencies. Traders continue to closely monitor developments out of Europe as Greece struggles to form a coalition government and ratify the strict measures needed to secure the next tranche of bailout funds. With rates on Italian bonds soaring to record euro-era highs, concerns have now started to shift as investors demanded higher yields to hold Italian debt. Despite the surge yields, the mood remains calm with many traders holding on the sidelines as European headlines continue to dominate newswires.

The dollar continues to hold below the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745 and could come under pressure if market sentiment continues to improve. The index now sits between the 20 and 50-day moving averages at 9684 and 9750 respectively with a break below risking substantial losses for the reserve currency. Note that daily RSI has also had trouble clearing the 50-mark suggesting that the greenback may lack enough momentum for a topside break of the 9745 level.

An hourly chart shows the index continuing to straddle the 50% Fibonacci retracement taken from the August 1st advance at 9730. Interim support rests at 9700 backed by the 61.8% retracement at 9633 and 9600. Topside resistance remains at 9745 backed by 9800 and the 38.2% retracement 9825.

The greenback fell against three of the four component currencies highlighted by a 0.23% decline against the Japanese yen. The USD/JPY has continued to drift lower as traders attempt to fade the recent run-up sparked by last week’s intervention. As we’ve noted in previous reports, it’s likely that yen advances will be limited as investors remain reluctant to test the resolve of Japanese officials by pressing the yen to high to quickly. The pound and aussie also made modest advances as the dollar eased against most of its major counterparts in US trade. It should come as no surprise that the euro was the worst performing currency of the lot with a loss of 0.12% on the session. As uncertainties regarding the situation in Greece mounting, the EUR/USD pair has continue to range within the confines of an ascending channel formation described in today’s EURUSD / AUDUSD Scalp report.

The economic docket Tuesday is rather negligible with the NFIB and IBD/TIPP economic optimism surveys on tap. With little in the way of data from the US, investors will continue to closely monitor newswires out of Europe with broader market sentiment likely to drive dollar price action.

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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