The greenback was markedly weaker at the close of North American trade on Tuesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) falling 0.38% on the session. Equity markets pared early losses after news that Italian Prime Minister Silvio Berlusconi had offered his resignation fueled optimism that Italy was on the proper path to fiscal discipline. Stocks rallied into the close with the Dow, the S&P, and the NASDAQ advancing 0.84%, 1.17%, and 1.20% respectively. However it’s worth noting that Berlusconi did site that he would not resign until parliament ratified the required austerity measures which are expected to be voted on next week. With new governments in Greece and Italy now being formed concerns over the European debt crisis have started to ease with risk appetite seeing a rebound in US trade. Still, not all fears have abated as is evident in the Italian bond market where yields on 10yr paper continued to climb to record euro-era highs above 6.7%.
The dollar pulled away from the key 38.2% Fibonacci extension taken from the 2010 and November 2010 crests at 9745 and may continue to come under pressure as broader markets sentiment improves. The index closed just below the 20-day moving average with daily RSI looking to rebound off resistance at the 50-mark.
An hourly chart shows the index breaking below the 9700-level before finding solace at 9670. Interim support now rests here with subsequent floors seen at the 61.8% Fibonacci retracement taken from the August 1st advance at 9633, 9600, and he 76.4% retracement at 9515. Topside resistance now stands at the 50% retracement at 9730. A breach here eyes topside targets at 9760, 9800, and the 38.2% retracement at 9825.
The greenback fell against all four of the component currencies highlighted by a 0.49% decline against the euro. Although the situation in Europe remains extremely fragile, progress made by the most indebted periphery nations continue to support risk as fears of an imminent default subside. However the dilemma is far from over and the euro is expected to come under pressure again once the euphoria of this week’s events diminish. The weakest performer of the lot was the aussie which advanced a mere 0.21% on the session. As noted in this morning’s Winners/Losers report, weaker than expected trade balance figures overnight and growing expectations for additional rate cuts from the RBA continue to weigh on the aussie as the high yielder lags.
The economic docket remains extremely light for Wednesday with only the September wholesale inventory print on tap. Consensus estimates call for inventories to rise by 0.6%, up from a previous print of 0.4%. Market focus will remain on Europe as officials in Greece and Italy scramble to form establish a new government and pass the required austerity measures needed to ensure further bailout funds. The dollar may continue to drift lower here if positive news flows continue out of the region.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.