3SOF

US Dollar Index...

The Dollar Index is headed for a test of primary support at 76. Respect would suggest that a bottom is forming; failure would offer a target of 71*. Twiggs Momentum (21-day) below zero indicates a down-trend, but a higher trough would also suggest a bottom.

* Target calculation: 76 - ( 81 - 76 ) = 71

Tuesday, February 8, 2011...

•   The dollar index this morning is weaker with the dollar/yen -0.14 yen and the euro/dollar +0.63 cents. The dollar index yesterday rallied to a 2-week high as the euro declined on weak German factory orders but gave up most of its gains and finished little changed on reduced safe-haven demand after the stock market rallied to a 2-1/2 year high: Dollar Index +0.012, USDJPY +0.130, EURUSD -0.00041.

                Bullish factors for the dollar included (1) the slump in the euro to a 2-week low against the dollar after Dec German factory orders contracted more than expected, and (2) expectations for strong US economic data this week on US consumer credit and weekly initial jobless claims, which will bolster optimism that the US economic recovery can be sustained.

                Bearish factors included (1) euro supportive comments from ECB Council member Gonzalez-Paramo who said that interest rates would have to rise if inflation doesn't start to decline by the end of the year, and (2) the larger-than -expected increase in the Feb Euro-Zone Sentix investor confidence which rose to a 3-1/4 year high and is euro bullish.

Wednesday, February 9, 2011...

•   The dollar index this morning is little changed with the dollar/yen +0.19 yen and the euro/dollar +0.25 cents. The dollar index yesterday weakened after China raised interest rates and on reduced safe-haven demand for the dollar as the stock market rallied: Dollar Index -0.030, USDJPY +0.043, EURUSD +0.00428.

                Bearish factors for the dollar included (1) the action by China to raise interest rates for the third time since mid-Oct, (2) reduced safe-haven demand for the dollar after the stock market rallied and as tensions eased in Egypt, and (3) hawkish comments from ECB Council member Mersch that lifted the euro when he said policy makers would need to come up with "a rigorous intervention" if higher inflation persists.

                Bullish factors included (1) dollar supportive comments from Richmond Fed President Lacker who said the quickening US recovery means policy makers need to take "quite seriously" their commitment to review the $600 billion asset-purcha se program scheduled to end in June, which suggests he favors ending the QE2 program sooner rather than later, and (2) the unexpected decline in Dec German industrial production, which is euro negative.

Thursday, February 10, 2011...

•   The dollar index this morning is higher with the dollar/yen +0.46 yen and the euro/dollar -1.08 cents. The dollar index yesterday weakened and closed lower after Fed Chairman Bernanke told the House Budget Committee that high US unemployment will persist: Dollar Index -0.358, USDJPY -0.014, EURUSD +0.01072.

                Bearish factors for the dollar included (1) comments from Fed Chairman Bernanke who said the US unemployment rate is likely to remain high "for some time," which is dollar bearish as it may prompt the Fed to keep its quantitative easing measures intact and possibly expand them, and (2) the increase in the 10-year German bund yield to a 1-year high of 3.315%, which benefits the euro's interest rate differentials.

                Bullish factors included (1) the report from Reuters that well-known monetary policy hawk Axel Weber will drop out of the race to succeed Jean-Claude Trichet as head of the ECB, which is euro negative as rate-hike expectations were reduced, and (2 ) comments from Treasury Secretary Geithner who said the US economic "recovery is accelerating" and that the US is growing twice as fast as Europe or Japan.

Friday, February 11, 2011...

•   The dollar index this morning is trading higher and at a 3-week high with the dollar/yen +0.36 yen and the euro/dollar -0.84 cents. The dollar index yesterday rallied on strong US economic data and renewed European sovereign-debt concerns: Dollar Index +0.609, USDJPY +0.868, EURUSD -0.01313.

                Bullish factors for the dollar included (1) the fall in weekly initial US unemployment claims to a 2-1/2 year low, which suggests improvement in the US economy, and (2) weakness in the euro on renewed sovereign-debt concerns after the yield on the 10-year Portuguese bond climbed to 7.64%, the highest since the introduction of the euro in 1999.

                Bearish factors included (1) euro supportive comments from ECB Council member Wellink who said that upside risks to price stability "clearly dominate" in the short term and that Europe's recovery was becoming more self-sustaining, and (2) reduced safe-haven demand for the dollar on speculation that Egyptian President Mubarak woul d shortly bow to protesters' demands and step down as President of Egypt.

US Dollar Index...

The Dollar Index is headed for a test of short-term support at 77 after encountering resistance at 78.50. Twiggs Momentum (21-day) below zero indicates a down-trend, and failure of 77 would test primary support at 76. In the long term, breach of primary support would signal a down-trend, with a target of 71*, while respect would suggest that a bottom is forming.

* Target calculation: 76 - ( 81 - 76 ) = 71

Monday, February 14, 2011...

•   The dollar index this morning is trading higher and at a 3-week high with the dollar/yen -0.01 yen and the euro/dollar -1.00 cent. The dollar index last Friday rallied to a 3-week high on uncertainty in Egypt along with the increase in Feb US consumer confidence: Dollar Index +0.210, USDJPY +0.223, EURUSD -0.00540.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar after Egyptian President Mubarak stepped down, which increases uncertainty on who is going to take control in Egypt, (2) weakness in the euro which fell to a 3-week low against the dollar after ECB Council Member and Bundesbank President Weber said he will step down effective Apr 30, which may reduce ECB rate-hike expectations as Weber is a staunch inflation fighter and his absence from the ECB is euro negative, (3) the jump in the Feb US University of Michigan consumer confidence to an 8-month high, which is positive for the US economy and supportive for the dollar.

                Bearish factors included (1) the rally in the S&P 500 Index to a 2-1/2 year high, which reduces the safe-haven demand for the dollar, and (2) hawkish comments from ECB Council member and Bank of France President Noyer who said that "we are not willing to make compromises on second-round effects" of higher inflation to feed through into higher wage demands.

Tuesday, February 15, 2011...

•   The dollar index this morning is trading weaker with the dollar/yen +0.35 yen and the euro/dollar +0.47 cents. The dollar index yesterday pushed up to a 3-week high after the euro weakened when Euro-Zone finance ministers ruled out immediate steps to tackle the debt crisis: Dollar Index +0.154, USDJPY -0.122, EURUSD -0.00586.

                Bullish factors for the dollar included (1) the slump in the euro to a 3-week low against the dollar on renewed concerns over the European sovereign-debt crisis after Reuters reported that a rescue plan for WestLB AG, the German state-owned bank bailed out during the financial crisis, may founder, (2) disagreement among European leaders on debt reduction targets after Ireland's main opposition party said a new Irish government would seek to renegotiate detail's of the country's recent financial bailout and Greece said that demands from the European Union and the IMF that Greece sell state assets to raise as much as 50 billion euros by 2015 to pay down debt were "unacceptable."

                Bearish factors included (1) strength in the yen against the dollar after Japan's Q4 GDP contracted less than expected, and (2) dollar negative comments from New York Fed President Dudley who said that he backs continued Fed asset purchases to "help ease financial conditions" and stimulate economic growth.

Wednesday, February 16, 2011...

•   The dollar index this morning is trading lower with the dollar/yen +0.03 yen and the euro/dollar +0.17 cents. The dollar index yesterday closed slightly lower as weaker-than-expected US retail sales and an increase in German investor confidence undercut support for the dollar: Dollar Index -0.041, USDJPY +0.446, EURUSD -0.00014.

                Bearish factors for the dollar included (1) the increase in the Feb German ZEW investor confidence to a 7-month high, which is euro supportive, and (2) the weaker-than-expected Jan US retail sales, which is dollar negative.

                Bullish factors included (1) the weaker-than-expected Q3 Euro-Zone GDP, which is euro negative, and (2) the larger than expected increase in the Dec net long-term TIC flows, which shows continued strong foreign demand for US dollar assets.

Thursday, February 17, 2011...

•   The dollar index this morning is trading little changed with the dollar/yen -0.07 yen and the euro/dollar -0.12 cents. The dollar index yesterday weakened on reduced safe-haven demand for the dollar as global stock markets rallied on optimism the global economic recovery can continue: Dollar Index -0.350, USDJPY -0.096, EURUSD +0.00816.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after the S&P 500 climbed to a 2-1/2 year high, (2) comments from an unnamed German government official that the G-20 will discuss ways of diversifying global currency reserves when they meet this weekend in Paris, which may lead to reduced demand for dollars or a reduction in the dollar's status as the world's reserve currency.

                Bullish factors included (1) stronger-than-expected US economic data on Jan housing starts and Jan producer prices, and (2) data from the IMF that shows Greek and Irish banks have issued at least 70 billion euros ($95 billi on) of bonds to create the collateral required to get cash from the ECB, which is a form of quantitative easing and euro negative as the banks are basically issuing unsecured loans to themselves.

US Dollar Index...
The Dollar Index encountered resistance at 79, suggesting that the correction will continue. Failure of medium-term support at 77 would confirm. Twiggs Momentum (21-day) completion of a peak below zero would warn of continuation of the primary down-trend. Breach of support at 76 would confirm, offering a target of 71*. Respect of 76 is less likely, but would indicate that a bottom is forming.

* Target calculation: 76 - ( 81 - 76 ) = 71

Friday, February 18, 2011...

•   The dollar index this morning is trading higher with the dollar/yen +0.10 yen and the euro/dollar -0.54 cents. The dollar index yesterday closed lower for a third day as Treasury yields weakened and US jobless claims rose more than expected: Dollar Index -0.233, USDJPY -0.369, EURUSD +0.00400.

                Bearish factors for the dollar included (1) the drop in Treasury yields to a 2-week low, which weakens the dollar's interest rate differentials and reduces demand for dollar assets, (2) the larger-than-expected increase in weekly US jobless claims, which indicates a struggling labor market that may prompt the Fed into additional stimulus at the expense of the dollar, (3) strength in the British pound which rallied to a 2-week high against the dollar after BOE policy maker Sentance said the BOE should raise interest rates to boost the pound as a means of curbing inflation, and (4) reduced safe-haven demand for the dollar after the S&P 500 climbed to a 2-1/2 year high.

                Bullish factors included (1) comments from Portuguese government minister Pereira who said that delay in an "effective" European response to the "turbulence" in sovereign debt markets hurts the euro, and (2) a possible increase in the safe-haven demand for the dollar after Iran said it is sending 2 warships through the Suez Canal, which risks an Iranian confrontation with Israel.

Tuesday, February 22, 2011...

•   The dollar index this morning is trading higher with the dollar/yen -0.04 yen and the euro/dollar +0.01 cent. The dollar index last Friday slid to a 1-week low and settled lower after an ECB Council member said interest rates may need to be raised to combat inflation: Dollar Index -0.331, USDJPY -0.201, EURUSD +0.00764.

               Bearish factors for the dollar included (1) the rally in the euro to a 1-week high against the dollar after ECB Executive Board member Smaghi said the ECB may need to raise interest rates as global inflation pressures mount, and (2) strength in the British pound which climbed to a 2-week high against the dollar after Jan UK retail sales rose by almost four times expectations.

               Bullish factors included (1) the unexpected decline in Feb France business confidence, which is euro negative, and (2) comments from former Japanese vice finance minister Gyohten who said the dollar won't lose its status as the world's reserve currency as it will take China 10 to 15 years to complete the financial reforms needed for the yuan to be included in the IMF's foreign-exchange basket.

Wednesday, February 23, 2011...

•   The dollar index this morning is trading lower with the dollar/yen +0.20 yen and the euro/dollar +0.87 cents. The dollar index yesterday closed higher but well off its best levels after strong safe-haven demand for the dollar was offset by hawkish comments from an ECB official: Dollar Index +0.079, USDJPY -0.337, EURUSD -0.00348.

                Bullish factors included (1) increased safe-haven demand for the dollar as violent protests escalated in Libya, (2) the action by Moody's Investors Service to lower the outlook on Japan's Aa2 debt rating to negative from stable, which is yen negative, (3) the unexpected increase in Feb US consumer confidence to a 3-year high, which is dollar supportive, and (4) the prediction from the head of Germany's Ifo research institute that Greece is likely to be forced to restructure its debt because EU governments won't flood Greece with financial aid, that exiting the euro would wreck Greece's banking system, and a 20% to 30% cut in domestic wages in Greece to restore competitiveness would trigger civil disorder.

                Bearish factors for the dollar included (1) hawkish comments from ECB Council member Mersch who said ECB officials may toughen their language on inflation when they meet next week, which suggests the ECB may be ready to raise interest rates in the near future, and (2) the larger-than-expected decline in Dec S&P/CaseShiller composite-20 home price index which showed US home prices fell -2.4% y/y, their biggest year-over-year decline in a year, and signals continued weakness in the US housing market.

Thursday, February 24, 2011...

•   The dollar index this morning is trading weaker and at a 3-week low with the dollar/yen -0.68 yen and the euro/dollar +0.19 cents. The dollar index yesterday slipped to a 2-1/2 week low and settled lower on speculation that the BOE and ECB will hike interest rates before the Fed: Dollar Index -0.359, USDJPY -0.261, EURUSD +0.00978.

                Bearish factors included (1) strength in the British pound which rose to a 2-1/2 week high against the dollar after the minutes of the Feb 10 BOE policy meeting showed BOE policy maker Dale joined fellow policy members Sentance and Weale in voting for an interest rate increase, (2) speculation that the ECB may be ready to raise interest rates after ECB President Trichet said that policy makers will make the decisions "necessary to maintain price stability," and (3) the unexpected increase in Dec Euro-Zone industrial new orders, which is euro supportive.

                Bullish factors included (1) increased safe-haven demand for the dollar as the stock market slumped on continued unrest in North Africa and the Middle East, (2) the unexpected increase in the Jan existing home sales to their best level in 8 months, which is dollar supportive, and (3) comments from Philadelphia Fed President Plosser who said he "won't rule out" an early exit to the Fed's quantitative easing program if the economy strengthens.