The greenback surged throughout North American trade on Wednesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing 1.51% on the session. Concerns about the ongoing crisis in Europe seem to have reached critical mass as yields on Italian bonds reached their highest levels since the inception of the euro above 7.6%. Global equity markets witnessed a massive risk sell-off which carried over into the US open with the Dow, the S&P, and the NASDAQ plummeting 3.20%, 3.67%, and 3.88% respectively. Higher yielding, “risk” currencies plunged as traders jettisoned yields in favor of the safety of the greenback and the yen. Currency trading crowds have also aggressively turned on the greenback, suggesting that further topside moves may be likely if markets continue to foresee further debt contagion in the European region.
The dollar promptly reversed is course, breaking through the key 38.2% Fibonacci extension taken from the 2010 and November 2010 crests at 9745 before closing just shy of the 9830 resistance level. As we noted in yesterday’s USD Trading report, a daily RSI break back above the 50-mark bodes well for further dollar advances and the rally could pick up steam of conditions in Europe deteriorate further.
An hourly chart shows the index breaking above the 38.2% Fibonacci extension taken from the August 1st and October 27th troughs at 9754 before breaching the 9800-mark. Interim resistance now stands at 9830 backed by the 50% extension at 9850 and 9900. Support holds with the 38.2% extension with a break below eyeing subsequent floors at 9690, the 23.6% extension at 9636, and 9600.
The greenback advanced against all four component currencies highlighted by a 2.37% advance against the Australian dollar. As noted in Wednesday morning’s Winners/Losers report, the aussie continues to suffer on the back of risk aversion flows and increasing expectations of further RBA rate cuts. Scalp setups for the aussie have fared rather well over the past 24-hours as the dollar mounted a massive offensive throughout the session. The yen was the best performer of the lot, sliding a mere 0.11% as haven flows also supported the low yielder and limited any substantial advances in the USD/JPY pair.
The economic docket for Thursday remains rather quiet save the September trade balance figures and weekly jobless claims. The US trade deficit is expected to widen to $46.2B from a previous print of 45.6B with a significant miss here likely to weigh further on broader market sentiment. Despite the data, again we note that all eyes remain focused on developments out of the euro zone as officials in Greece and Italy scramble to form a cohesive government and ratify strict austerity measures required by the EU. Meanwhile the dollar will continue to advance so long as uncertainties in the region and debt concerns prevail.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.