3SOF

Thursday, December 30, 2010...

•   The dollar index this morning is trading lower and at a 1-1/2 week low with the dollar/yen -0.06 yen and the euro/dollar +0.26 cents. The dollar index yesterday settled lower as the euro strengthened on rising consumer prices in Germany and an increase in private sector lending in the Euro-Zone: Dollar Index -0.569, USDJPY -0.774, EURUSD +0.01103. The yen strengthened to a 1-1/2 month high against the dollar.

                Bearish factors for the dollar included (1) the report from the ECB that Nov European loan growth to the private sector rose +2.0% y/y, the fastest pace of growth since Apr 2009, (2) the +1.9% y/y increase in Dec German CPI (EU harmonized), its largest y/y gain in 2 years, and (3) reduced safe-haven demand for the dollar after the Dow and S&P 500 rallied to 2-1/4 year highs.

Friday, December 31, 2010...

•   The dollar index this morning is trading lower and at a 2-1/2 week low with the dollar/yen -0.22 yen and the euro/dollar +0.97 cents. The dollar index yesterday fell to a 2-week low and closed lower after stronger-than-expected US economic data prompted a decline in dollar demand in favor of riskier assets: Dollar Index -0.275, USDJPY -0.089, EURUSD +0.00633. The yen strengthened to a 1-1/2 month high and the euro rose to a 1-1/2 week high against the dollar.

                Bearish factors for the dollar included (1) strength in commodity currencies such as the Australian dollar which rose to its highest level against the dollar since it became free-floating in 1983, and (2) the rally in the yen to a 1-1/2 month high against the dollar as stronger-than-expected US economic data prompted reduced demand for dollars in favor of higher-yielding riskier assets.

                Bullish factors included (1) comments from ECB Council member Nowotny who said it can't be ruled out "that there will be f urther challenges for some Euro-Zone countries in 2011," and (2) and an increase in Treasury yields which benefits the dollar's interest rate differentials and may help boost foreign demand for dollar assets.

Monday, January 3, 2011...

•   The dollar index this morning is trading 0.37 points higher with the dollar/yen up 0.31 yen and the euro/dollar down 0.74 cents. The dollar index is higher this morning on some short-covering after last Friday's sharp sell-off. The dollar index last Friday sank to a 5-week low and closed lower for the seventh consecutive session as Euro-Zone officials jawboned the euro higher: Dollar Index -0.493, USDJPY -0.393, EURUSD +0.00963. The yen rallied to a 1-1/2 month high and the euro rose to a 2-1/2 week high against the dollar.

                Bearish factors for the dollar included (1) strength in the British pound after Dec UK nationwide house prices unexpectedly rose for the first time in 7 months, (2) comments from German Chancellor Merkel who vowed to defend the euro as the "foundation" of her nation's economy, and (3) comments from Jean-Claude Juncker, head of the Euro-Zone finance ministers, who said the euro is the world's "most solid" currency and that " the euro's existence and its essence are not at risk."

                Bullish factors was the prediction from the Chief Executive of the CEBR that the Euro-Zone will have another debt crisis this spring when Italy and Spain have to refinance more than 400 billion euros ($532 billion) of bonds.

Tuesday, January 4, 2011...

•   The dollar index this morning is trading slightly lower by 0.17 points, with the dollar/yen up 0.44 yen and the euro/dollar up 0.44 cents. The euro is higher on strong European stocks and an improved view of the European economy. The dollar index on Monday consolidated above last Friday's 6-week low and closed slightly higher: Dollar Index +0.193, USDJPY +0.62, EURUSD -0.0023.

                Bullish factors for the dollar included the strong US economic data and some technical short-covering after last Friday's 6-week low.

Wednesday, January 5, 2011...

•   The dollar index this morning is trading stronger, with the dollar/yen +0.14 yen and the euro/dollar -0.75 cents. The dollar on Tuesday closed mildly higher: Dollar Index +0.292, USDJPY +0.30, EURUSD -0.0053.

                Bullish factors included the stronger-than-expected US economic data and some short-covering after last week's sell-off.

                Bearish factors included the pound-positive news of the 16-year high in the UK PMI index to 58.3 and the euro-positive news of a rise in the Eurozone CPI to 2.2% y/y from +1.9% in November, which was above the ECB's inflation ceiling.

Friday, January 7, 2011...

•   The dollar index this morning is higher and at a 1-month high with the dollar/yen +0.24 yen and the euro/dollar -0.25 cents. The dollar on Thursday strengthened throughout the day and settled higher: Dollar Index +0.533, USDJPY +0.088, EURUSD -0.01464. The dollar index climbed to a 1-month high and the euro tumbled to a 1-month low against the dollar.

                Bullish factors included (1) euro weakness after Nov Euro-Zone retail sales unexpectedly declined along with concern that the European debt crisis is worsening after KBC Groep NV, Belgium's largest bank, said it will take additional provisions of as much as 330 million euros ($434 million), partly related to its Irish loan book, and (2) increased demand for dollars on speculation that Friday's Dec payrolls report will show strength in the economy with employers adding jobs for a third month.

                Bearish factors included (1) the biggest monthly increase in Nov German factory orders in the last 10 months, and (2) the larger- than-expected increase in the Dec Euro-Zone business climate indicator to its best level in 3-1/2 years, which is euro positive.

Monday, January 10, 2011...

•   The dollar index this morning is stronger and trading at a 1-1/4 month high with the dollar/yen +0.06 yen and the euro/dollar -0.04 cents. The dollar last Friday gyrated between gains and losses and finally finished slightly higher: Dollar Index +0.148, USDJPY -0.291, EURUSD -0.00935. The dollar index climbed to a 1-1/4 month high and the euro slumped to a 3-1/2 month low against the dollar.

                Bullish factors included (1) euro weakness on increased sovereign-debt risks after the Markit iTraxx SovX Western Europe Index of credit-default swaps on the debts of 15 European governments rose to a record high 214, (2) the unexpected decline in Nov German retail sales by -2.4% m/m, its biggest fall in 2-1/2 years, and (3) comments from ECB President Trichet who said governments shouldn't rely on the ECB to get Europe out of its debt crisis as he urged for more fiscal tightening, which may slow the Euro-Zone economy and weaken the euro.

               Bearish factors included (1) the smaller -than-expected increase in Dec US nonfarm payrolls, which may prompt the Fed to further increase its quantitative easing measures, and (2) comments from Fed Chairman Bernanke who said the US economy is in a "weak" and "fragile" condition and that "it could take 4 to 5 more years for the job market to normalize fully."

Tuesday, January 11, 2011...

•   The dollar index this morning is weaker with the dollar/yen +0.27 yen and the euro/dollar +0.23 cents. The dollar index yesterday fell back from a 1-1/4 month high and settled lower: Dollar Index -0.131, USDJPY -0.339, EURUSD +0.00417.

                Bearish factors included (1) a recovery in the euro which rebounded from a 3-3/4 month low against the dollar and settled higher after ECB President Trichet said that recent European economic indicators "were better than forecast," and (2) the stronger than expected Nov French industrial and manufacturing production, which is euro positive.

                Bullish factors included (1) the early slump in the euro to a 3-3/4 month low against the dollar on concern the European sovereign-debt crisis may worsen after the Markit iTraxx SovX Western Europe Index of credit-default swaps on the debts of 15 European governments rose to a record high 223, and (2) the prediction from BlueGold Capital Management that Germany, France and other European to p-rated nations risk having their credit ratings downgraded in the event that European policy makers expand bailout funds.

Wednesday, January 12, 2011...


•   The dollar index this morning is lower with the dollar/yen +0.13 yen and the euro/dollar +0.03 cents. The dollar index yesterday closed little changed: Dollar Index -0.035, USDJPY +0.536, EURUSD +0.00225.

                Bearish factors included (1) strength in the euro after Japanese Finance Minister Noda said his country plans to buy more than 20% of bonds to be issued later this month by the European Financial Stability Facility as Japan joins China in promising to purchase Euro-Zone debt in an attempt to stem the European debt crisis, (2) comments from Portuguese Prime Minister Socrates who said that Portugal doesn't need a bailout from the European Union and its 2010 budget deficit will be lower than forecast, and (3) strength in the yuan after China's foreign-exchange reserves climbed to a record and China's bank lending exceeded the government's annual target.

                Bullish factors included (1) apprehension ahead of Portugal's, Spain's and Italy's debt auctions later this week, whic h may see increased safe-haven demand for the dollar as the indebted European nations struggle to fund their deficits, (2) comments from ECB Council member Weber who said optimism on containing the European sovereign-debt crisis is "premature," and (3) comments from Philadelphia Fed President Plosser who said the Fed's $600 billion QE2 asset-purchase program "may soon backfire on us" and spur inflation if "we don't begin to gradually reverse course," which indicates he is not in favor of completing the entire asset-purchase program.

Thursday, January 13, 2011...

•   The dollar index this morning is weaker and at a 1-week low with the dollar/yen -0.01 yen and the euro/dollar +0.41 cents. The dollar index yesterday settled sharply lower: Dollar Index -0.815, USDJPY -0.245, EURUSD +0.01587.

                Bearish factors included (1) strength in the euro after Portugal's borrowing costs fell from a month ago after a successful auction of 10-year notes, which temporarily eases sovereign-debt concerns, (2) speculation that European leaders will increase their efforts to stem the debt crisis after European Union Economic and Monetary Affairs Commissioner Rehn said that Europe's bailout fund "should be reinforced and the scope of its activity widened," (3) the stronger-than-expected Nov Euro-Zone industrial production, which is euro positive, and (4) euro supportive comments from PBOC Deputy Governor Yi Gang who said that China is a long-term investor in European financial markets and will continue that policy.

                Bullish factors included (1) a pprehension ahead of Spain's and Italy's debt auctions on Thursday, which may see increased safe-haven demand for the dollar as the indebted European nations struggle to fund their deficits, and (2) the warning from Nobel Prize-winning economist Pissarides that the European Union doesn't have the resources to rescue Spain from a full-blown fiscal crisis, which could lead to the end of the euro.

Friday, January 14, 2011...

•   The dollar index this morning is slightly higher and rebounded from a 2-week low with the dollar/yen +0.12 yen and the euro/dollar -0.34 cents. The dollar index yesterday fell to a 1-week low and closed lower for a third day: Dollar Index -0.840, USDJPY -0.186, EURUSD +0.02311.

                Bearish factors included (1) euro supportive comments from ECB President Trichet who said the risks to medium term inflation "are still broadly balanced but could move to the upside," and (2) strong demand for Spain's auction of 5-year bonds, which eased sovereign-debt concerns and boosted the euro to a 1-week high against the dollar.

                Bullish factors included (1) the unexpected narrowing of the Nov US trade balance, which is dollar supportive, and (2) the larger-than-expected increase in Dec US producer prices which posted their biggest monthly gain in 11 months.

Dollar strengthens

US Dollar Index...
The US Dollar Index is consolidating between 79 and 81.50. Upward breakout is more likely, especially considering that Twiggs Momentum (21-day) is holding above zero. Breakout would signal a primary advance with a medium-term target of 84*, while reversal below 79 would test primary support at 76.

* Target calculation: 79 + ( 81 - 76 ) = 84

Tuesday, January 18, 2011...

•   The dollar index this morning is weaker and at a 1-3/4 month low with the dollar/yen -0.14 yen and the euro/dollar +1.11 cents. The dollar index last Friday rebounded from a 2-week low to settle little changed: Dollar Index -0.029, USDJPY +0.186, EURUSD +0.00096.

                Bearish factors included (1) weaker-than-expected US economic data on retail sales and consumer confidence, (2) strength in the euro after euro supportive comments from ECB Council member Weber who said "the economic outlook has brightened considerably" and that inflation risks "could well move to the upside," (3) the action by Citigroup to revise its forecast for the ECB's first rate increase to the second half of this year from the first quarter of 2012, and (4) the recommendation from BNP Paribas that investors buy the euro against the dollar after recent comments from ECB President Trichet and fellow council member Weber "are a significant change in tone" and will prompt the m arket to price in earlier rate hikes from the ECB.

                Bullish factors included (1) the stronger-than-expected Dec US industrial production and capacity utilization, and (2) the prediction from Brown Brothers Harriman that he euro may weaken to $1.18 by Jun as the European debt crisis weighs on sentiment.

Wednesday, January 19, 2011...

•   The dollar index this morning is weaker and at a 1-3/4 month low with the dollar/yen -0.32 yen and the euro/dollar +0.91 cents. The dollar index yesterday slid to a 1-3/4 month low and finished weaker on speculation Euro-Zone finance ministers will increase efforts to prevent the sovereign-debt crisis from deepening: Dollar Index -0.375, USDJPY -0.442, EURUSD +0.00142.

                Bearish factors included (1) a rally in the euro to a 1-month high against the dollar on speculation that European leaders will increase their efforts to stem the debt crisis after European Union Economic and Monetary Affairs Commissioner Rehn said, "We shall improve our current existing financial backstops so that the so-called market forces cannot have even the slightest doubt about our capacity to act even in the most stresses scenarios," (2) the larger-than-expected increase in the Jan German ZEW economic sentiment survey to a 6-month high, which is euro supportive, (3) strength in the Brit ish pound which climbed to a 1-3/4 month high against the dollar after Dec UK CPI matched its highest level in 2 years and fuels speculation the BOE may need to raise interest rates, and (4) the prediction from the Canadian Imperial Bank of Commerce that the Fed will be on hold until 2013 as the US housing and labor markets struggle to recover.

                Bullish factors included (1) comments from Philadelphia Fed President Plosser who said he won't rule out raising interest rates despite unemployment remaining too high for the foreseeable future, and (2) the larger-than-expected increase in the Nov long-tern TIC flows, which signals strong foreign demand for US dollar assets.

Thursday, January 20, 2011...

•   The dollar index this morning is weaker with the dollar/yen +0.21 yen and the euro/dollar +0.19 cents. The dollar index yesterday slumped to a 1-3/4 month low and settled lower amid signs the US economic recovery will remain sluggish: Dollar Index -0.322, USDJPY -0.538, EURUSD +0.00855.

                Bearish factors included (1) the slump in Dec US housing starts to a 20-month low, which may weaken the economy as the housing crisis lingers, and (2) strength in the euro which rose to a 1-3/4 month high against the dollar as debt concerns eased as Portugal's borrowing costs fell after strong demand was seen at the sale of 750 million euros of 1-year Portuguese bills.

                Bullish factors included (1) comments from ECB Council member Nowotny who said that ECB President Trichet's CPI statements were interpreted by financial markets in a "one-sided-way" and that he "sees present rates adequate" for the "foreseeable future," which diminishes speculation that the ECB is on the verge or raising borrowing costs, and (2) the fall in Greek 10-year government bonds after Die Zeit newspaper reported that the German government is considering a plan that would help Greece "restructure" its debt, which raised sovereign-debt concerns and increased safe-haven demand for the dollar.