Dollar seen too weak in lowest index since June

The Dollar Index (NYBOT:DXU13) is setting the stage for a rally after falling to its lowest level since mid-June as traders position themselves for a stronger currency.

The measure, which IntercontinentalExchange Inc. uses to monitor the greenback against the currencies of six major U.S. trading partners, has tumbled 4.3% to 81.105 from last month’s high of 84.753 on July 9. The losses have slowed, and trading patterns show any close above 82.41 would pave the way for further gains, according to Bank of America Corp.

“The market has dictated the 82.41 level as a pivot,” MacNeil Curry, New York-based chief rates and currencies technical strategist at Bank of America’s Merrill Lynch unit, said yesterday in a telephone interview. “If we get back above that, it would be a good sign that we have a base in place and a larger bull trend can resume.”

After surging as much as 5.9% during the first five months of the year, America’s currency has been on a roller- coaster ride as traders respond to mixed messages from the Federal Reserve on when it may begin to reduce its extraordinary stimulus. The central bank has been printing dollars to buy $85 billion of bonds every month, with the extra supply weighing on the greenback.

Accommodative Policy

Fed Chairman Ben S. Bernanke said on June 19 that officials may start dialing down their unprecedented bond-buying program this year and end it entirely in mid-2014 if the labor market showed sustained improvement. He then said on July 10 that the U.S. central bank would maintain a “highly accommodative monetary policy for the foreseeable future.”

After soaring to 84.498 on May 23, the Dollar Index fell to as low as 80.498 on June 19 before rising to July’s high. It has been in a range of 81.239 to 82.494 in the 12 trading days through yesterday. That’s significant because the index has held key “support” levels at 81.40 and 81.57, according to Bank of America, making 82.41 more important.

For all the hand-wringing over Fed policy, the economy is showing signs of strength. U.S. gross domestic product will expand 2.7% next year, according to the median forecast of 79 economists surveyed by Bloomberg. That compares with an average estimate of 1.9% for the Group of 10 nations.

Options traders are bullishly positioned on the dollar, paying a premium to buy the currency versus all 16 of its major counterparts except the yen. The one-year, euro-dollar risk- reversal rate is 1.78%, exceeding the average of 1.59% that investors have paid in 2013.

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