3SOF

Friday, February 25, 2011...

•   The dollar index this morning is trading higher with the dollar/yen unchanged and the euro/dollar -0.13 cents. The dollar index yesterday fell to a 3-week low on concerns the surge in energy prices will slow the US economy along with hawkish comments from ECB Council member Weber: Dollar Index -0.352, USDJPY -0.620, EURUSD +0.00517.

                Bearish factors included (1) concern that the jump in crude prices to a 2-1/3 year high will derail the US economic recovery, and (2) strength in the euro which climbed to a 3-week high against the dollar after ECB Council member Weber said "interest rates know only one direction, and that is north," which hints the ECB may be preparing the markets for an interest rate hike.

                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, and (2) comments from St. Louis Fed President Bullard who said that since November the risk of deflati on has fallen and inflation expectations have increased, which may merit a reduction in the Fed's QE 2 asset-purchase program.

Gold tests resistance as dollar weakens

US Dollar Index...
The Dollar Index is testing medium-term support at 77 and failure would threaten primary support at 76. Completion of a Twiggs Momentum (21-day) peak below zero would warn of continuation of the primary down-trend. Breach of primary support would offer a target of 71*.

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

Monday, February 28, 2011...

•   The dollar index this morning is trading weaker and slumped to a 3-1/2 month low with the dollar/yen +0.20 yen and the euro/dollar +0.74 cents. The dollar index last Friday rebounded from a 3-week low and finished higher on hawkish comments from Richmond Fed President Lacker: Dollar Index +0.197, USDJPY -0.224, EURUSD -0.00470.

                Bullish factors included (1) comments from Richmond Fed President Lacker who said an early end to the Fed's QE2 asset-purchase program may be needed to limit inflation pressures, and (2) weakness in the British pound which fell to a 1-week low against the dollar after UK Q4 GDP was unexpectedly revised lower.

                Bearish factors included (1) the larger-than-expected downward revision to US Q4 GDP, (2) comments from French Finance Minister Lagarde who said that Spain's finances have improved and the country won't need a bailout, and (3) the action by Morgan Stanley to raise its Q1 target for the euro to $1.32 from $1.25 and to raise its year-end tar get for the euro against the dollar to $1.24 from $1.20, citing increased rhetoric from the ECB about the need for tighter monetary policy to combat inflation.

Tuesday, March 1, 2011...

•   The dollar index this morning is trading weaker and at a fresh 3-1/2 month low with the dollar/yen +0.29 yen and the euro/dollar +0.13 cents. The dollar index yesterday slumped to a 3-1/2 month low and finished lower on speculation that Fed Chairman Bernanke on Tuesday will signal the Fed will keep interest rates at a record low: Dollar Index -0.378, USDJPY +0.117, EURUSD +0.00532.

                Bearish factors included (1) strength in the euro on concern that rising inflation pressures will prompt the ECB to raise interest rates after Jan French producer prices rose +5.6% y/y, the fastest pace in 2-1/3 years and Jan Euro-Zone CPI rose +2.3% y/y, its fastest pace in 2-1/4 years, and (2) speculation that Fed Chairman Bernanke on Tuesday in his semiannual report on monetary policy to Congress will signal the Fed will keep interest rates at a record low for the foreseeable future.

                Bullish factors included (1) the surge in the Feb Chicago purchasing managers index to its best level in 22-1/2 years, which signals strength in the economy, and increased safe-haven demand for the dollar on concern the turmoil in the Middle East is spreading after civil unrest was reported in Oman.

US Dollar Index...

The Dollar Index is testing medium-term support at 77 and failure would threaten primary support at 76. Breach of primary support would offer a target of 71*. Recovery above 79, however, would complete a double bottom and suggest a rally

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

Wednesday, March 2, 2011...

•   The dollar index this morning is trading lower with the dollar/yen +0.10 yen and the euro/dollar +0.48 cents. The dollar index yesterday rebounded from a 3-1/2 month low and finished higher on strong US manufacturing data along with increased safe-haven demand on concern the civil unrest in the Middle East is spreading: Dollar Index +0.160, USDJPY +0.074, EURUSD -0.00288.

                Bullish factors included (1) the stronger-than-expected Feb US ISM manufacturing index which matched its 27-year high from May-2004 and signals US economic strength, (2) increased safe-haven demand for the dollar on concern the turmoil in the Middle East is spreading to Iran, and (3) comments from Fed Chairman Bernanke who said that rising oil and commodity prices won't derail the economic recovery.

                Bearish factors included (1) strength in the euro after the European Commission revised up their 2011 GDP and inflation forecasts for the Euro-Zone, which will keep pressure on the ECB to tighten monetary policy, and (2) strength in the British pound which surged to a 13-month high against the dollar after Feb UK PMI manufacturing remained unchanged at its best level since 1992, which may prompt the BOE to increase interest rates.

Thursday, March 3, 2011...

•   The dollar index this morning is trading little changed with the dollar/yen -0.03 yen and the euro/dollar -0.09 cents. The dollar index yesterday sank to a 3-3/4 month low and closed lower as a surge in oil prices threatens economic growth: Dollar Index -0.378, USDJPY +0.010, EURUSD +0.00878.

                Bearish factors included (1) a rally in crude oil to near a 2-1/2 year high, which threatens to derail economic growth, (2) comments from Fed Chairman Bernanke who said a "sustained period of strong job creation" is needed to ensure a solid recovery and that interest rates will stay low for an "extended period," which signal's the Fed will not raise interest rates anytime soon and that spurred inflation concerns and weakens the dollar's interest rate differentials, and (3) strength in the euro which climbed to a 3-3/4 month high against the dollar after the Jan Euro-Zone PPI accelerated to its fastest pace of increase in 2-1/3 years.

                Bullish factors included ( 1) renewed European sovereign-debt concerns that are bearish for the euro after Standard & Poor's kept ratings on Greece's and Portugal's debt credit watch negative, saying both countries debt ratings remain at risk of being cut on concern about how a European Union rescue fund may affect holders of the two nations' sovereign bonds, and (2) the prediction from Axa Investment Managers that Portugal will accept a financial bailout "within the next few weeks" as the cost of issuing debt becomes unsustainable.

Friday, March 4, 2011...

•   The dollar index this morning is trading little changed with the dollar/yen +0.21 yen and the euro/dollar +0.01 cents. The dollar index yesterday fell to a 3-3/4 month low but closed well off of its worst levels after ECB President Trichet hinted at raising interest rates as soon as next month: Dollar Index -0.197, USDJPY +0.579, EURUSD +0.01035.

                Bearish factors included (1) hawkish comments from ECB President Trichet which boosted the euro when he said "strong vigilance is warranted" and an "increase of interest rates in the next meeting is possible," (2) stronger-than-expected Jan German retail sales and Jan Euro-Zone retail sales, which are euro bullish, and (3) dovish comments from Minneapolis Fed President Kocherlakota who said the Fed's "highly accommodative" policy is warranted given a natural rate of unemployment that may range between 5.8% and 8.9%.

                Bullish factors included (1) strong US economic data on weekly jobless and Feb IS M non-manufacturing activity, which shows economic strength, and (2) the unexpected downward revision to the Feb Euro-Zone PMI composite index, which is euro negative.

Monday, March 7, 2011...

•   The dollar index this morning is trading weaker and at a 4-month low with the dollar/yen -0.23 yen and the euro/dollar +0.37 cents. The dollar index last Friday fell to a 4-month low but closed only slightly lower after Fitch Ratings revised down its outlook on Spain's debt rating: Dollar Index -0.126, USDJPY -0.126, EURUSD +0.00166.

                Bearish factors included (1) the surge in crude oil to a 2-1/2 year high, which threatens US economic growth and may prompt the Fed into maintaining its overly easy monetary policy, and (2) the action by Rabobank Group to raise its 3-month target for the euro against the dollar to $1.42 from a previous forecast of $1.40, citing increased hawkishness from the ECB.

                Bullish factors included (1) strong US economic data after the Feb US unemployment rate unexpectedly declined to a 1-3/4 year low and Jan factory orders increased by the most in 4-1/4 years, which indicates economic strength, and (2) the action by Fitch Ratings to revise its outl ook on Spain's debt rating to negative from stable, which is euro bearish, as it cited the potential cost of rescuing its savings banks and risks to the economic recovery.

Tuesday, March 8, 2011...

•   The dollar index this morning is trading higher with the dollar/yen +0.35 yen and the euro/dollar -0.62 cents. The dollar index yesterday slid to a 4-month low but recovered its losses and finished slightly higher after the euro weakened on renewed European sovereign-debt risks: Dollar Index +0.096, USDJPY -0.079, EURUSD -0.00178.

                Bullish factors included (1) weakness in the euro on rising sovereign-debt concerns after Moody's Investor's Service cut Greece's credit rating three steps to B1, citing the rising risk of default along with the surge in Ireland's 10-year bond yield to 9.477%, the highest since 1993, after the incoming Irish government said it may need to introduce new laws to allow the restructuring of some senior bank bonds, as the country's debt level risks becoming "unsustainable," and (2) increases safe-haven demand for the dollar as the stock market tumbled.

                Bearish factors included (1) the surge in crude oil to a 2-1/2 year high, which threa tens US economic growth and may prompt the Fed into maintaining its overly easy monetary policy, (2) the increase in the March Euro-Zone Sentix investor confidence to a 3-1/2 year high, which is euro supportive, and (3) the statement from Morgan Stanley that it is no longer "bearish" on the euro given the outlook for the ECB to raise interest rates this year and next as they revised up their 2011 year-end forecast for the euro to $1.45 from an earlier forecast of $1.24.

Wednesday, March 9, 2011...

•   The dollar index this morning is trading slightly weaker with the dollar/yen +0.02 yen and the euro/dollar +0.31 cents. The dollar index yesterday strengthened on increased safe-haven demand after the euro fell back on concern the European sovereign-debt crisis will worsen: Dollar Index +0.096, USDJPY -0.079, EURUSD -0.00178.

                Bullish factors included (1) weakness in the euro after the yield on the 10-year Greek bond jumped 51 bp to 12.84%, the highest since Bloomberg data began in 1988, on weak demand for a Greek T-bill auction, and (2) weakness in the British pound which fell to a 1-week low against the dollar after Feb UK retail sales declined and home prices fell, which cut expectations for BOE rate hikes this year.

                Bearish factors included (1) the stronger-than-expected Jan German factory orders, which is euro bullish, and (2) comments from ECB Council member Weber who said he "doesn't want to correct market expectations" for as many as three quarter poi nt increases in the 2-week refinancing rate to 1.75% this year, and (3) the action by Danske Bank A/S to raise their 6-month forecast for the euro to $1.50 from $1.42, citing the outlook for ECB rate hikes.

Thursday, March 10, 2011...

•   The dollar index this morning is trading stronger and at a 1-week high with the dollar/yen +0.19 yen and the euro/dollar -0.67 cents. The dollar index yesterday fell back on concern rising fuel costs will derail the US economy along with strength in the euro on speculation the ECB will buy the bonds of the Euro-Zone's most indebted nations: Dollar Index -0.077, USDJPY +0.070, EURUSD +0.00042.

                Bearish factors included (1) concern the recent surge in energy prices will derail the US economy and prompt the Fed into maintaining its overly easy monetary policy, (2) speculation the ECB will purchase the bonds of its most indebted nations after the yields on Portuguese debt climbed to a record, and (3) the larger-than-expected increase in Jan German industrial production, which is euro bullish.

                Bullish factors included (1) increased safe-haven demand for the dollar after the managing director of European sovereign ratings at Standard & Poor's warned some countries in the Euro-Zone might have their credit ratings cut further while a Greek debt default is a "possibility," and (2) concern the European sovereign-debt crisis will worsen after weak demand for a government auction of Portuguese debt sent the yield on Portugal's 10-year bond soaring to 7.70%, the highest since data began in 1997.

Friday, March 11, 2011...

•   The dollar index this morning is trading higher and at a 1-1/2 week high with the dollar/yen -0.67 yen and the euro/dollar -0.04 cents. The dollar index yesterday rallied to a 1-1/2 week high on concern the European sovereign-debt crisis may worsen: Dollar Index +0.555, USDJPY +0.239, EURUSD -0.01114.

                Bullish factors included (1) increased safe-haven demand for the dollar after global stock markets slumped when Moody's Investors Service cut Spain's credit rating by one level to Aa2, saying the government has underestimated the cost of shoring up the banking industry, and (2) weakness in the euro which fell to a 1-week low against the dollar on concern that European debt risks are rising after the cost to insure Spain's government bonds rose to a 1-month high, while the cost to insure Portugal's debt rose to a 2-month high and the cost to insure Greek debt climbed to a record high.

                Bearish factors included (1) the larger-than-expected Jan US trade balance which widened by the most in 7 months and is dollar negative, and (2) the larger-than-expected increase in weekly US jobless claims, which may prompt the Fed to maintain its overly easy monetary policy as the US labor market continues to struggle.

Monday, March 14, 2011...

•The dollar index this morning is weaker with the dollar/yen +0.17 yen and the euro/dollar +0.60 cents. The dollar index last Friday retreated from a 1-1/2 week high and closed lower as the euro strengthened from hawkish ECB comments and the yen strengthened on safe-haven demand following Japan's earthquake and on speculation companies will repatriate yen back to Japan to pay for quake damages: Dollar Index -0.500, USDJPY +1.088, EURUSD +0.01054.

                Bearish factors included (1) hawkish comments from ECB Council member Bini Smaghi who said new inflation forecasts "are based on market prices" and the ECB rate policy must adapt to increasing inflation pressures, which suggests he favors an immediate rate hike by the ECB, and (2) strength in the yen on increased safe-haven demand following the Japanese earthquake along with speculation that insurance companies will buy the yen to pay for damages from the 8.9-magnitude quake.

                Bullish factors included (1) strength in Feb US retail sales which gained the most in four months, and (2) infighting between EU leaders on how to fix the European sovereign-debt crisis, which is negative for the euro, after Irish Prime Minister Kenny rebuffed German Chancellor Merkel's conditions on easing bailout terms.

Tuesday, March 15, 2011...

•The dollar index this morning is stronger with the dollar/yen -0.26 yen and the euro/dollar -1.10 cents. The dollar index yesterday weakened for a second day after European Union leaders agreed over the weekend to expand the scope of their rescue fund in an attempt to quell the European debt crisis: Dollar Index -0.427, USDJPY -0.259, EURUSD +0.00894.

                Bearish factors included (1) strength in the euro after EU leaders over the weekend agreed to expand the scope of their rescue fund and allow officials to buy debt in primary markets, while also cutting the cost of bailout loans to Greece by extending the repayment period of Greek loans to 7-1/2 years from 3 years, and (2) early strength in the yen which rallied to a 4-monh high against the dollar on speculation Japanese domestic investors will repatriate yen back to Japan to pay for earthquake and tsunami damages.

                Bullish factors included (1) weakness in the yen which retreated from a 4-month high after the BOJ pumped a record 15 trillion yen ($183 billion) into money markets and doubled the size of its asset-purchase program in an attempt to stabilize financial markets which were hammered following the Japanese earthquake, and (2) increased safe-haven demand for the dollar after global equity markets tumbled.