The U.S. Dollar

[setravis]

US Dollar Index...

The US Dollar Index is consolidating below resistance at 83.5. Downward breakout would test support at 80, while upward breakout would test 89. Reversal below zero by 63-day Twiggs Momentum would warn of a primary decline to 76.5*; respect of the zero line, on the other hand, would strengthen the bull signal.

Target calculation: 80 - ( 83.5 - 80 ) = 76.5

[setravis]

US Dollar Index...

The US Dollar Index is headed for a test of primary support at 80; failure would signal a decline to 77*. Reversal above 83.5 is unlikely, but indicate an advance to 89. Respect of zero by 63-day Twiggs Momentum favors continuation of the primary down-trend.

Target calculation: 80 - ( 83 - 80 ) = 77

[setravis]

US Dollar Index...
Dollar plunge causes gold surge
The US Dollar Index broke through primary support at 80, signaling a decline with an initial target of 77*. The sharp fall of 63-day Twiggs Momentum below the zero line strengthens the bear signal. The falling dollar is expected to cause a general rise in precious metals, crude oil and currency crosses.

Target calculation: 80 - ( 83 - 80 ) = 77

[setravis]

US Dollar Index...
The US Dollar Index is declining towards its target of 76.50* after a brief retracement to test the new resistance level at 80. Respect of the zero line by 21-day Twiggs Momentum signals a strong down-trend.

Target calculation: 80 - ( 83.50 - 80 ) = 76.50

[setravis]

Currency Manipulation...
The US House of Representatives passed legislation allowing, but not requiring, the U.S. to levy tariffs on countries that undervalue their currencies (WSJ). This is dangerous ground as imposition of trade tariffs to protect local industries is widely believed to have harmed international trade and increased the severity of the Great Depression in the 1930s. It would be wise to avoid a repeat.

A better alternative may be to isolate flows on the capital account, which are used by trading partners such as Japan and China to manipulate the strength of the US dollar through purchases of US Treasurys, and to deal with these separately to normal trade flows. Steps could then be taken to ensure that capital flows are managed to deter currency manipulators. Either by insisting on reciprocity or levying some form of penalty to discourage further purchases.

Mass exodus of capital may be seen as a potential threat, driving up long-term interest rates and the cost of servicing Treasury debt, but this may prove to be a paper tiger. The resultant fall in the US dollar would stimulate exports and restrict imports, boosting the US economy at the expense of the manipulators. What goes around comes around.

[setravis]

US Dollar Index...

The US Dollar Index is testing support at 76.5; failure would test the 2009 low of 74.5. Twiggs Momentum (21-day) below its August low, after respecting the zero line, confirms a strong down-trend.

* Target calculation: 80 - ( 83.50 - 80 ) = 76.50

[setravis]

Dollar climbs amid questions about Fed program...

NEW YORK (AP) — The dollar strengthened Wednesday after concerns grew that the Federal Reserve's plans to buy Treasurys might be smaller and slower than traders anticipated.

Traders have been expecting that the Fed will announce a plan next week to swiftly buy U.S. Treasurys, with some estimating the purchases could top $1 trillion. However a report Wednesday in the Wall Street Journal said the bond-buying program could be smaller and stretched out over more months than expected.

Smaller and slower purchases helped the dollar regain some of its value Wednesday compared with the euro and Japan's yen. It was the second straight day the dollar rallied against the currencies.

The dollar had been hammered in recent weeks as investors expected the U.S. central bank to start buying government-backed bonds. The purchases are aimed at driving bond yields and interest rates lower. The lower yields make other currencies and investments more attractive than Treasurys and the dollar.

The euro bought $1.3761 in late trading in New York Wednesday, down from $1.3850 late Tuesday. The British pound fell to $1.5758 from $1.5835 against the dollar.

The dollar rose to 81.71 yen, compared with 81.49 a day ago.

The dollar also rose to 1.0298 Canadian dollars from 1.0246 Canadian dollars, and moved up to 0.9917 Swiss francs from 0.9861 Swiss francs.

[setravis]

Will the Fed go ahead?


The G-20 meeting of finance ministers failed to produce any firm, enforcable targets. The current status quo is likely to continue for the foreseeable future, with China and other net exporters accumulating forex reserves in order to suppress the value of their currencies. Expect the greenback to weaken further, however, if the Fed goes ahead with plans to introduce more quantitative easing (QE2) at its November 3 meeting.


US Dollar Index...

The US Dollar Index retracement found support at 77. Breakout above 78.5 would signal a secondary rally to test resistance at 80. Rising Twiggs Momentum (21-day) indicates a correction, but respect of the zero line (from below) would warn of another primary decline — as would respect of resistance at 78.5 on the price chart.

* Target calculation: 80 - ( 83.50 - 80 ) = 76.50

[setravis]

US Dollar Index...

The US Dollar Index broke support at 76.5, offering a short-term target of 74.5*. Respect of the declining trendline by Twiggs Momentum (21-day) would warn of a strong primary decline.

* Target calculation: 78.5 - ( 78.5 - 76.5 ) = 74.5

[setravis]

Wednesday, November 10, 2010...

The dollar index this morning is trading higher with the dollar/yen +0.60 yen and the euro/dollar -0.18 cents. The dollar index yesterday traded weaker early but rebounded mid-morning to a 1-week high and stayed higher the rest of the day and finished with modest gains: Dollar Index +0.416, USDJPY +0.497, EURUSD -0.01478.

Bullish factors for the dollar included (1) weakness in the euro which fell to a 1-week low against the dollar on increased European sovereign-debt risks after the yield spread between Irish 10-year bonds and similar-maturity benchmark German bunds widened to a record 554 bp and the yield spread between Portuguese 10-year bonds and bunds widened to a record 452 bp, and (2) the recommendation from Standard Bank Plc for investors to sell the euro against the dollar on expectations the euro will weaken to $1.3450 shortly from $1.3900 today.

Bearish factors for the dollar included (1) strength in the yen after China said it will introduce new rules on cu rrency provisioning and tighten management of banks' foreign-debt quotas in order to curb capital flows into its economy, and (2) the unexpected increase in the Oct Bank of France business sentiment which unexpectedly rose +1 to a 2-1/2 year high of 103 and is euro positive.

[setravis]

Thursday, November 11, 2010...

The dollar index this morning is trading higher with the dollar/yen -0.01 yen and the euro/dollar -0.75 cents. The dollar index yesterday moved up to a 2-week high and finished higher on increased safe-haven demand for the dollar when the euro tumbled on heightened sovereign-debt risk concerns: Dollar Index +0.191, USDJPY +0.580, EURUSD +0.00101. The yen fell to a 1-month low against the dollar.
                Bullish factors for the dollar included (1) the slump in the euro to a 1-month low against the dollar after the yield spread between Irish 10-year bonds and similar-maturity German bunds widened to a record 622 bp along with weak demand for a Portuguese bond auction that had a bid-to-cover ratio of 2.1, down from 4.9 at a sale in Sep, (2) the surge in the yield on the 10-year T-note to a 1-3/4 month high, which makes dollar-denominated assets more attractive to international investors, and (3) the narrower-than-expected Sep US trade balance, which is dollar bullish.
                Bearish factors for the dollar included (1) comments from Brazil's Finance Minister who said the Group of 20 nations may discuss at their meeting later this week reducing the dollar's role as a reserve currency in favor of a basket that could include the real and the yuan, and (2) strength in the Chinese yuan which rose to 6.6395 against the dollar, the strongest level since China unified official and market exchange rates at the end of 1993.

[setravis]

US Dollar Index...

The US Dollar Index rallied off support at 76, but is now encountering resistance at 78.5. Breakout would test 80, while reversal below 76 would offer a medium-term target of 73.5*. Penetration of the declining trendline by Twiggs Momentum (21-day) favors a rally, but respect of the zero line would confirm the primary down-trend.

* Target calculation: 76 - ( 78.5 - 76 ) = 73.5

[setravis]

Friday, November 12, 2010...

•   The dollar index this morning is trading higher and at a 5-week high with the dollar/yen -0.36 yen and the euro/dollar +0.46 cents. The dollar index yesterday rallied to a 2-week high and finished near its high on increased safe-haven demand as the euro weakened due to heightened sovereign-debt risk concerns: Dollar Index +0.191, USDJPY +0.580, EURUSD +0.00101.
                Bullish factors for the dollar included (1) the slump in the euro to a 5-week low against the dollar after Ireland's central bank Governor and ECB Council member Honohan said Irish and international banks' loan losses in his country may total at least 85 billion euros ($117 billion), and (2) comments from French Finance Minister Lagarde who said "investors must share the cost of sovereign debt restructurings," which boosted the safe-haven demand for the dollar on concern some Euro-Zone nations may need to restructure their debt in order to avoid defaulting.
                Bearish factors for the dollar included (1) the ECB's monthly report in which the central bank raised its 2010 Euro-Zone GDP forecast to 1.6% from a 1.1% estimate made 3 months ago and raised its 2011 GDP forecast to 1.5% from 1.4%, and (2) comments from ECB Executive Board member Gonzalez-Paramo who said he doesn't rule out higher interest rates in the "medium term" if signs of inflationary pressures appear.

[setravis]

November 10, 2010...
G-20 Will Play Into Dollar's Hands

The U.S. looks set to get just what it doesn't want — a strong dollar.

By introducing more quantitative easing last week, the Federal Reserve might well have been hoping for a further decline in the U.S. currency to help boost the economic recovery alongside the increased monetary kick that a $600 billion dose of bond buying will give.

Instead, the Fed's move has raised the ire of its major global competitors and essentially blown the prospect of a negotiated solution to current account imbalances at the upcoming summit of the Group of 20 industrialized and developing nations in Seoul.

This resumption of the status quo will only help the dollar as the risk of competitive devaluations returns and a slump in risk appetite sends investors scurrying back into safe havens.

The irony is that the need for an adjustment to the imbalances is becoming even more acute than ever.

The latest trade figures from Beijing showed that while China shipped $25 billion of goods into the U.S. last month, the U.S. managed to send only $7 billion of exports to China.

Nevertheless, a draft of the statement that leaders are expected to issue after the G-20 summit is said to mention neither the words 'foreign exchange' nor 'imbalances'.

G-20 sources also said the final communique won't include any numerical targets, despite U.S. proposals that G-20 should place a limit on current account surpluses.

A measure of just how isolated the U.S. is on the whole issue came from the wording in a report Tuesday from China's Dagong Global Credit Rating Company when it downgraded U.S. sovereign debt to A+ from AA.

"It is likely that an overall crisis might be triggered by the U.S. government's policy to continuously depreciate the U.S. dollar against the will of its creditors."

Of course, this fierce criticism helps to reduce the chances of any more QE out of the Fed in the future and contribute to dollar strength.

But, as investors prepare for an uneventful G-20, they will have another good reason to start buying the dollar again–the increased risk that Asian economies will once again resort to competitive currency devaluations in an effort to ensure that a weak dollar doesn't undermine their own export recovery.

They will certainly remain sensitive to the hot money inflows that have tended to drive their currencies higher, eventually resorting once again to capital controls, verbal as well as market intervention that will only boost global market uncertainty and make the dollar's safe haven status even more attractive.

[setravis]

Monday, 15 November 2010...


•The dollar index this morning is trading higher and posted a 1-1/4 monthhigh in overnight trade with the dollar/yen +0.45 yen and the euro/dollar -0.55 cents. The dollar index last Friday pushed up to a 5-week high early but erased its gains and finished lower on speculation that European leaders will support Ireland and other indebted Euro-Zone nations: Dollar Index -0.135, USDJPY -0.050, EURUSD +0.00240.
                Bearish factors for the dollar included (1) the statement from European finance ministers that attended the G-20 summit in South Korea who said a crisis-resolution mechanism they are contemplating won't force bondholders of indebted Euro-Zone nations to share bailout costs, which lifted the euro off of a 1-1/4 month low against the dollar, and (2) reduced safe-haven demand for the dollar after Ireland's Finance Ministry said "there are no talks on an application for emergency funding from the European Union."
                Bullish factors for the dollar included (1) the downward revision to the Q3 GDP growth rates of Germany, France, and the Euro-Zone, which is euro negative, and (2) the unexpected drop in Sep Euro-Zone industrial production, which posted its steepest decline in 18 months.