3SOF

Dollar breaks support...

US Dollar Index
The US Dollar Index broke below support at 79, signaling a test of primary support at 76. Twiggs Momentum (21-day) reversing below zero strengthens the signal. Recovery above 79.50 is unlikely, but would warn of a bear trap.

Friday, January 21, 2011...

•   The dollar index this morning is weaker with the dollar/yen -0.26 yen and the euro/dollar +0.55 cents. The dollar index yesterday strengthened on stronger-than-expected US economic data along with weakness in commodity currencies: Dollar Index +0.183, USDJPY +0.980, EURUSD -0.00004.

                Bullish factors included (1) signs of strength in the US economy after weekly US initial unemployment claims fell more than expected and Dec existing home sale rose to a 7-month high, and (2) weakness in the commodity currencies of the world (i.e., Australian and Canadian dollars) on concerns that Chinese demand for commodities may weaken on speculation the PBOC may hike interest rates further after China's Q4 GDP expanded more than forecast.

                Bearish factors included (1) the stronger-than-expected Dec German producer prices, which is euro bullish, and (2) the warning from Fitch Ratings that record US budget deficits due to stimulus measures and a lack of a plan to reduce debt may undermine confidence in the dollar and will place the US as the "worst of any AAA rated sovereign."

US Dollar Index...

The US Dollar Index broke below support at 79, signaling a test of primary support at 76. Twiggs Momentum (21-day) reversing below zero strengthens the signal. Recovery above 79.50 is unlikely, but would warn of a bear trap.

Monday, January 24, 2011...

•   The dollar index this morning is higher with the dollar/yen +0.33 yen and the euro/dollar -0.63 cents. The dollar index last Friday slid to a 2-month low and closed lower after business confidence in Germany unexpectedly increased: Dollar Index -0.610, USDJPY -0.416, EURUSD +0.01414.

                Bearish factors included (1) the rally in the euro to a 2-month high against the dollar after the unexpected increase in the Jan IFO German business climate to its highest level since records for a reunified Germany began in 1991, which is euro supportive, and (2) the increase in the Jan French business confidence indicator to a 2-3/4 year high.

                Bullish factors for the dollar last Friday was the warning from Fitch Ratings that there is a continuing risk that Euro-Zone nations will have their credit ratings downgraded until fiscal consolidation is secured and the economic recovery is broad-based, which may lead to renewed safe-haven demand for the dollar.

Tuesday, January 25, 2011...

•   The dollar index this morning is stronger with the dollar/yen -0.09 yen and the euro/dollar -0.12 cents. The dollar index yesterday fell to a 2-1/4 month low and closed lower on reduced safe-haven demand for the dollar as the stock market rallied: Dollar Index -0.195, USDJPY -0.051, EURUSD +0.00234.

                Bearish factors included (1) a rally in the euro to a 2-month high against the dollar after the unexpected increase in the Jan Euro-Zone PMI composite index which expanded at its fastest level in 6 months, and (2) reduced safe-haven demand for the dollar after the equity market rallied.

                Bullish factors for the dollar included (1) dovish comments from ECB Council member Stark who said "I could imagine" the European Financial Stability Facility "recapitalizing banks or buying sovereign-debt," which would be negative for the euro, and (2) comments from ECB President Trichet who said the ECB wouldn't react to a temporary jump in inflation caused by higher c ommodity prices as long as it doesn't fuel wage increases, or so-called "second-round effects," which signals no near-term interest rate hike by the ECB despite any uptick in inflation.

Wednesday, January 26, 2011...

•   The dollar index this morning is lower and at a 2-1/2 month low with the dollar/yen -0.07 yen and the euro/dollar +0.22 cents. The dollar index moved higher early yesterday but finished little changed after Treasury yields fell on speculation President Obama will propose a 5-year freeze on non-security discretionary spending: Dollar Index -0.048, USDJPY -0.276, EURUSD +0.00443.

                Bullish factors included (1) a slump in the British pound to a 1-1/2 week low against the dollar after Q4 UK GDP unexpectedly contracted, (2) the jump in Jan US consumer confidence to an 8-month high, and (3) renewed European sovereign-debt concerns after Moody's Investors Service warned that Spain's banks may need as much as 89 billion euros in a stressed case scenario.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after the IMF raised their forecast for global economic growth this year to 4.4% from an Oct forecast of 4.2%, (2) the unexpected increase in Feb German GfK consumer confidence which climbed to a 3-year high and is euro supportive, and (3) the 9 bp drop in the 10-year T-note yield on speculation President Obama will propose a 5-year freeze on non-security discretionary spending, which weakened the dollar's interest rate differentials.

Thursday, January 27, 2011...

•   The dollar index this morning is weaker and fell to a fresh 2-1/2 month low in overnight trade with the dollar/yen +0.82 yen and the euro/dollar +0.09 cents. The dollar index fell to a 2-1/2 month low yesterday but finished little changed on speculation that continued stimulus from the Fed will sustain the US economic recovery: Dollar Index -0.104, USDJPY -0.079, EURUSD +0.00306.

                Bearish factors included (1) strength in the euro which rallied to a 2-month high against the dollar after Dec German import prices rose +12.0% y/y, the fastest annual pace in 29 years, and (2) the increase in the 3-month Euribor rate to a 1-1/2 year high of 1.051%, which shows strong demand for euros.

                Bullish factors for the dollar included (1) speculation that the Fed's quantitative easing will sustain the US economic recovery, (2) the stronger-than-expected Dec US home sales which rose to an 8-month high and signals strength in the US economy, and (3) comments from ECB President Trichet wh o said that ECB government bond purchases are an "ongoing program," which is euro negative as it signals no immediate end to ECB bond purchases.

January 28, 2011...

•   The dollar index this morning is lower with the dollar/yen -0.73 yen and the euro/dollar -0.13 cents. The dollar index slipped to a 2-1/2 month low yesterday and finished lower on concern the US economy will struggle to sustain the recovery: Dollar Index -0.171, USDJPY +0.745, EURUSD +0.00206.

                Bearish factors for the dollar included (1) weak US economic data on Dec durable goods orders and weekly jobless claims, which may prevent the Fed from ending its stimulus measures, (2) euro supportive comments from ECB Council member Bini Smaghi who said that policy makers in advanced economies "can no longer afford" to ignore imported inflation, and (3) jawboning from French President Sarkozy that boosted the euro when he said European leaders would continue defending the euro and that "the consequences of a euro failure would be so cataclysmic that we can't even entertain the idea."

                Bullish factors included (1) the drop in the Japanese yen to a 2-week low against the dollar after Standard & Poor's cut Japan's credit rating one step to AA-, saying the government lacks a "coherent strategy" to address a 943 trillion yen ($11 trillion) debt burden, and (2) the prediction from S&P that it sees Spain, Ireland, Greece and Portugal "stuck in recession" due to the sovereign-debt crisis, which would be euro negative.

Dollar weakens, gold finds support

US Dollar Index...

The fall in the greenback is slowing, reflected by shorter bodies on the last three candles. Expect retracement to test the new resistance level at 79 on the US Dollar Index. Respect would confirm a test of primary support at 76. Twiggs Momentum (21-day) below zero suggests a down-trend; a peak below zero would strengthen the signal. Recovery above 79.50 is unlikely, but would warn of a bear trap.

Monday, January 31, 2011...

•   The dollar index this morning is weaker with the dollar/yen +0.09 yen and the euro/dollar +0.65 cents. The dollar index last Friday overcame early weakness and finished higher on increased safe-haven demand on concern that civil unrest in Egypt may spread: Dollar Index +0.406, USDJPY -0.789, EURUSD -0.01239.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar after Fitch Ratings lowered the outlook on Egypt's debt rating to "negative" from "stable," saying the civil unrest increases the "uncertainty" over political and economic prospects, and (2) the larger-than-expected increase in the Jan US University of Michigan consumer confidence, which bolsters the prospects for the US economy.

                Bearish factors included (1) the weaker-than-expected US Q4 GDP, and (2) the warning from Moody's Investors Service that it may need to place a "negative" outlook on the US debt rating sooner than anticipated.

Tuesday, February 1, 2011...

The dollar index this morning is weaker and posted a fresh 2-1/2 month low with the dollar/yen -0.41 yen and the euro/dollar +0.58 cents. The dollar index yesterday fell to a 2-1/2 month low and closed moderately lower after US inflation slowed further below the Fed's long-term forecast and after the euro strengthened when Euro-Zone inflation accelerated this month: Dollar Index -0.415, USDJPY -0.087, EURUSD +0.00843.

                Bearish factors for the dollar included (1) the +0.7% y/y increase in the Dec PCE core deflator, the Fed's preferred price index, which posted its smallest increase since records began in 1959 and may prompt the Fed into additional stimulus measures, which would be dollar negative, (2) the increase in the Jan Euro-Zone CPI estimate to +2.4% y/y, its biggest increase in 2-1/4 years, which may prompt the ECB into raising interest rates sooner than expected, and (3) stronger interest rate differentials for the euro after the 3-month Euribor rate rose to a 1- 1/2 year high of 1.074%.

                Bullish factors included (1) the unexpected decline in Dec German retail sales which fell for the second straight month and is euro negative, and (2) stronger-than-expected US economic data on Dec personal spending and the Jan Chicago purchasing managers index, which is dollar supportive as it indicates continued expansion of the US economy.

Wednesday, February 2, 2011...

•   The dollar index this morning is weaker and posted a fresh 2-3/4 month low in overnight trade with the dollar/yen +0.12 yen and the euro/dollar -0.25 cents. The dollar index yesterday posted a 2-1/2 month low and closed lower for a second day on reduced tensions in Egypt along with strength in the euro on speculation that the Euro-Zone rescue fund may buy distressed government debt: Dollar Index -0.668, USDJPY -0.624, EURUSD +0.01327.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after concern eased from the Egyptian crisis when the Egyptian military said it won't fire on protesters, (2) a rally in the euro to a 2-1/2 month high against the dollar after people familiar with the situation said European officials were near an agreement to enable the 440 billion euro rescue fund to buy bonds directly from distressed governments instead of offering bailout loans, (3) strong European economic data which is euro supportive after German unemployment fell to an 18-year low in Jan and the Jan Euro-Zone PMI manufacturing index was unexpectedly revised up to a 9-month high, (4) strength in the British pound which rallied to a 2-1/2 month high against the dollar after the Jan UK PMI manufacturing index unexpectedly expanded at its best level since data began in 1992, and (5) stronger interest rate differentials for the euro after the 3-month Euribor rate rose to a 1-1/2 year high of 1.082%.

                Bullish factors included (1) the unexpected increase in the Jan ISM manufacturing index which expanded at its best level in 6-1/2 years and points to strong growth in the US manufacturing sector, and (2) the action by the ECB to fail to sterilize its recent bond purchases with deposits when it drained 68.2 billion euros ($93.9 billion) from money markets via 7-day term deposits, -8.3 billion euros less than the 76.5 billion euros it intended to absorb, which amounts to quantitative easing and is negative for the euro.

Thursday, February 3, 2011...

•   The dollar index this morning is higher with the dollar/yen +0.13 yen and the euro/dollar -0.48 cents. The dollar index yesterday sank to a 2-3/4 month low but erased its losses and finished higher after the euro plunged when S&P cut Ireland's credit rating: Dollar Index +0.036, USDJPY +0.201, EURUSD -0.00179.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar and weakness in the euro after Standard & Poor's cut Ireland's credit rating to A- from A and said the country remains on "creditwatch with negative implications," and (2) the action by the German government to rule out allowing the European Financial Stability Facility to fund bond buybacks for distressed European nations, which revives concern the sovereign-debt crisis may worsen.

                Bearish factors included (1) strength in the British pound which rallied to a 2-3/4 month high against the dollar after BOE policy member Sentance said the BOE must raise interest rates now at a steady pace to avoid a large increase later, and (2) the increase in the Dec Euro-Zone PPI to a 2-year high of 5.3% y/y, which raises expectations for rate hikes by the ECB and is euro supportive.

Friday, February 4, 2011...

•   The dollar index this morning is slightly higher with the dollar/yen +0.03 yen and the euro/dollar -0.05 cents. The dollar index yesterday settled higher after the euro slumped on dovish remarks from ECB President Trichet: Dollar Index +0.643, USDJPY +0.068, EURUSD -0.01766.

                Bullish factors for the dollar included (1) euro weakness after comments from ECB President Trichet who said that interest rates "remain appropriate" and inflation risks are "broadly balanced," which dims the prospects for ECB rate hikes, and (2) the stronger-than-expected Q4 nonfarm productivity and the unexpected decline in Q4 unit labor costs, which is dollar supportive.

                Bearish factors included (1) strength in the British pound which rallied to a 2-3/4 month high against the dollar after the Jan UK PMI services index increased to an 8-month high, which boosts expectations of interest rate hikes by the BOE this year, and (2) the unexpected upward revision to the Jan Euro-Zon e PMI composite index to a 9-month high, which is euro supportive.

Monday, February 7, 2011...

•   The dollar index this morning is stronger with the dollar/yen +0.15 yen and the euro/dollar -0.33 cents. The dollar index last Friday finished higher after the US Labor Department said the weak payrolls report was due to winter storms: Dollar Index +0.227, USDJPY +0.575, EURUSD -0.00470.

                Bullish factors for the dollar included (1) the statement from the US Labor Department that said bad weather prevented 886,000 Americans from going work to the week of the Labor Department's Jan monthly job survey, compared with an average of 282,000 over the past 5 Januarys, which suggests that winter storms caused much of the weakness in the Jan payrolls report, and (2) euro weakness after comments from ECB Council member Nowotny who said "The ECB anticipates 1.8% inflation" next year, which suggests the ECB still expects inflation to fall back below its 2.0% limit over its policy-relevant time horizon and reduces pressure on them to increase interest rates.

                Bearish factor s included (1) early weakness in the dollar after the weaker-than-expected Jan nonfarm payrolls, although the dollar recovered after the US Labor Department said weather caused most of the weakness, and (2) strong demand for euros as the 3-month Euribor rate climbed to a 19-month high of 1.088% as banks hoard euros on concern the ECB may withdraw its emergency cash supplies in April.