The U.S. Dollar

[setravis]

Wednesday, March 16, 2011...

•The dollar index this morning is higher with the dollar/yen -0.20 yen and the euro/dollar -0.55 cents. The dollar index yesterday rallied on increased safe-haven demand after global equity markets plunged along with the unexpected decline in German economic sentiment but gave up all of their gains when the Fed reaffirmed their plan to buy $600 billion of Treasuries through June: Dollar Index -0.021, USDJPY -0.911, EURUSD +0.00066.

                Bearish factors included (1) strength in the yen on speculation that insurers will repatriate dollar and euro assets back to yen to pay for earthquake damages, (2) the smaller-than-expected increase in Jan net long-term TIC flows, which indicates weakened foreign demand for US dollar assets, (3) the plunge in Treasury yields with the 10-year T-note yield falling to a 3-month low, which weakens the dollar's interest rate differentials, and (4) the post-FOMC statement in which the Fed reaffirmed its plan to buy $600 billion of Treasuries through June.

                Bullish factors included (1) increased safe-haven demand for the dollar after global stock markets plunged on fears of a Japanese nuclear disaster, (2) euro weakness after Mar German ZEW economic sentiment unexpectedly declined, and (3) comments from ECB President Trichet who said the package of economic-oversight rules adopted by EU finance ministers was "insufficient."

[setravis]

Thursday, March 17, 2011...

•   The dollar index this morning is weaker and trading at a 4-1/4 month low with the dollar/yen -1.18 yen and the euro/dollar +1.20 cents. The yen soared in overnight trade and posted a new post WWII high of 76.36 per dollar. The dollar index yesterday settled slightly lower as euro weakness from Moody's downgrade of Portugal's credit rating was offset by a rally in the yen to a new post-WWII high: Dollar Index -0.049, USDJPY -1.128, EURUSD -0.00999.

                Bearish factors included (1) strength in the yen which rallied to a new post WWII high against the dollar of 76.36 on speculation that insurers will repatriate dollar and euro assets back to yen to pay for earthquake damages along with strong demand for yen by banks after the yen libor rate rose 38 bp to 0.491%, a 2-year high, and (2) the 2.4% increase in Feb Euro-Zone CPI, a 2-1/4 year high, along with the larger-than-expected rise in Q4 Euro-Zone labour costs, which is euro positive as the data will keep the pressure on th e ECB to raise interest rates.

                Bullish factors included (1) euro weakness after Moody's Investors Service cut Portugal's long-term credit rating 2 levels to A3 from A1 and kept a negative outlook, which implies further downgrades in the future, and (2) the action by the BOJ to add 5 trillion yen into the financial system on top of the 28 trillion yen already injected into the system since Mar 14, which is yen negative.

[setravis]

Friday, March 18, 2011...

•               The dollar index this morning is weaker with the dollar/yen +2.55 yen and the euro/dollar +1.09 cents. The yen plunged in overnight trade after the G-7 central agreed to sell the yen in currency markets in coordinated intervention. The dollar index yesterday sank to a 4-1/4 month low and finished lower as the yen surged on speculation there will be no currency intervention before Friday's G-7 meeting: Dollar Index -0.640, USDJPY -0.694, EURUSD +0.01223.

                Bearish factors included (1) strength in the yen which rallied to a new post WWII high against the dollar of 76.36 as Japan's quake crisis prompted increased safe-haven demand for yen along with speculation that insurers will repatriate dollar and euro assets back to yen to pay for earthquake damages and reconstruction, and (2) reduced safe-haven demand for the dollar as the stock market rallied.

                Bullish factors included (1) the action by the G-7 nations to call for an emergency meeting on Friday, which may lead to some form of coordinated intervention to curb the yen’s gains, and (2) stronger-than-expected US economic data on weekly jobless claims and the Mar Philadelphia Fed manufacturing index, which signals economic strength and is positive for the dollar.

[setravis]

Monday, March 21, 2011...

•               The dollar index this morning is weaker with the dollar/yen +0.68 yen and the euro/dollar -0.13 cents. The dollar index last Friday tumbled to a 4-1/2 month low and finished lower on reduced safe-haven demand for the dollar after the stock market rallied and as Libya ordered a halt to its military action against rebel forces: Dollar Index -0.238, USDJPY +1.692, EURUSD +0.01606.

                 Bearish factors included (1) reduced safe-haven demand for the dollar after the stock market rallied, (2) reduced safe-haven demand for the dollar after Libya ordered a halt to all military operations against rebel forces, and (3) strength in the euro which climbed to a 4-1/2 month high against the dollar after ECB President Trichet said he doesn't want to change his hawkish stance on "strong vigilance" on inflation that he gave earlier this month, which fuels speculation the ECB still plans to raise interest rates next month.

                Bullish factors included (1) the action by the G-7 nations to announce coordinated currency intervention to weaken the yen, and (2) the plunge in Feb UK nationwide consumer confidence to its lowest level since data began in 2004, which is negative for the British pound.

[setravis]

Tuesday, March 22, 2011...

•               The dollar index this morning is weaker and trading at a fresh 1-1/4 year low with the dollar/yen -0.10 yen and the euro/dollar +0.15 cents. The dollar index yesterday slumped to a 1-1/4 year low and finished weaker on reduced safe-haven demand for the dollar after the stock market rallied along with hawkish rhetoric from the ECB: Dollar Index -0.317, USDJPY +0.440, EURUSD +0.04400.

                Bearish factors included (1) reduced safe-haven demand for the dollar after the stock market rallied, (2) hawkish comments from ECB Executive Board member Tumpel-Gugerell that lifted the euro to a 4-1/2 month high against the dollar after she reiterated ECB President Trichet's mantra that "strong vigilance" is necessary to keep a lid on inflation, which shows a consensus building among ECB policy makers for an interest rate hike as soon as next month's policy meeting, and (3) the weaker-than-expected Feb US existing home sales, which may prompt the Fed into keeping its overly easy monetary policy in place for the foreseeable future and further weaken the dollar's interest rate differentials.

                Bullish factors included (1) weakness in the yen on fears of further G-7 currency intervention, and (2) the announcement by the Treasury that it will wind down its $142 billion portfolio of MBS securities by $10 billion a month starting this month, which is dollar positive as it shows the Treasury reducing the size of its balance sheet.

[setravis]

Wednesday, March 23, 2011...

•               The dollar index this morning is little changed with the dollar/yen -0.20 yen and the euro/dollar -0.33 cents. The dollar index yesterday recovered from a 1-1/4 year low and finished little changed as the euro weakened on concern that European leaders cannot agree on a solution to the region's debt crisis: Dollar Index +0.033, USDJPY -0.060, EURUSD -0.00291.

                 Bullish factors included (1) weakness in the euro which fell from a 4-1/2 month high against the dollar on sovereign-debt concerns after the yield on Irish 2-year notes surged to 10.18%, the highest since Bloomberg began collecting the data, as Germany and France demand that Ireland raise its corporation tax rate in return for better terms on loans from the European Financial Stability Facility bailout fund, and (2) dollar friendly comments from Dallas Fed President Fisher who said there will be "no need for further monetary accommodation" in the US once the Fed's QE2 program ends in June.

                 Bearish factors included (1) the rally in the British pound to a 14-month high against the dollar on increased speculation the BOE will soon raise interest rates after Feb UK CPI rose at its fastest pace in 2-1/4 years, and (2) strong demand for euros from European banks after the 3-month Euribor rate, the rate at which Euro-Zone banks borrow between each other, rose 6 bp to a 1.185%, its highest level in 1-3/4 years.

[setravis]

Thursday, March 24, 2011...

•               The dollar index this morning is weaker with the dollar/yen +0.10 yen and the euro/dollar +0.35 cents. The dollar index strengthened yesterday and closed higher on concern Europe's sovereign-debt crisis may worsen: Dollar Index +0.360, USDJPY -0.055, EURUSD -0.01096.

                Bullish factors included (1) weakness in the euro after EU finance minister leader Juncker said the EU won't decide to expand the European Financial Stability Facility until June, dousing expectations for a resolution to the expansion of the bailout fund as soon as this weekend's EU summit, (2) weakness in the pound after the minutes of the Mar 10 BOE monetary policy meeting showed policy makers voted 6-3 to keep interest rates on hold along with the cut in Britain's 2011 GDP estimate to 1.7% from a Nov estimate of 2.1% by England's Office for Budget Responsibility, and (3) concern the European debt crisis will worsen after the yield on the 10-year Irish note exceeded 10% for the first time since the euro was introduced in 1999 and the yield on Portugal's 5-year bond rose to a record 8.14%.

                Bearish factors included (1) the unexpected plunge in Feb US new home sales to a record low, which may prompt the Fed to maintain its overly easy monetary policy at the dollar's expense, and (2) hawkish comments from ECB Executive Board member Smaghi who said that interest rates in the Euro-Zone are currently lower than the inflation rate and that keeping them at that level would be "very expansionist," which suggests he favors a rate hike as soon as next month.

[setravis]

Friday, March 25, 2011...

•               The dollar index this morning is slightly higher with the dollar/yen +0.30 yen and the euro/dollar -0.07 cents. The dollar index closed lower yesterday as the euro strengthened on speculation that European leaders will come up with a solution to the region's debt crisis as they begin a 2-day meeting in Brussels: Dollar Index -0.138, USDJPY +0.063, EURUSD +0.00908.

                Bearish factors included (1) strength in the euro on anticipation that EU leaders will come up with a solution to the European debt crisis, and (2) heightened speculation that the ECB will raise interest rates when it meets next on Apr 7, which would further improve the euro's interest rate differentials against the dollar.

                Bullish factors included (1) concern the European sovereign-debt crisis will worsen after European officials speculated that a bailout of Portugal would cost as much as 70 billion euros ($99 billion), (2) the action by Moody's Investors Service to cut the ratings on 30 Spanish banks to reflect Spain's sovereign downgrade, and (3) weakness in the British pound which retreated against the dollar after Feb UK retail sales came in weaker than expected.

[setravis]

US Dollar Index...
The US Dollar retraced to test the new resistance level at 76; respect would signal a decline to 71* — a bullish sign for gold. Twiggs Momentum well below zero suggests the down-trend will continue.

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

[setravis]

Monday, March 28, 2011...

•   The dollar index this morning is higher and at a 1-week high with the dollar/yen +0.34 yen and the euro/dollar -0.34 cents. The dollar index last Friday settled higher on concern about European government efforts to end the region's debt crisis: Dollar Index +0.561, USDJPY +0.362, EURUSD -0.00891.

                Bullish factors included (1) weakness in the euro on concern European leaders lack the resolve to quell the region's debt crisis after EU leaders caved in to German demands to cut the amount of startup capital for a program for future emergency aid, and (2) dollar supportive comments from Philadelphia Fed President Plosser who said the improving economy means the Fed should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates.

                Bearish factors included (1) the smaller-than-expected decline in Mar IFO business confidence, which is euro positive, (2) supportive interest rate differentials for the euro with the 3-month Euribor rate rising to a 1-3/4 year high of 1.203%, and (3) the plunge in Mar U.S. University of Michigan consumer confidence to a 16-month low, which is dollar negative.

[setravis]

Tuesday, March 29, 2011...

•   The dollar index this morning is little changed with the dollar/yen +0.43 yen and the euro/dollar -0.10 cents. The dollar index yesterday rallied to a 1-week high but shed its gains and closed slightly lower after hawkish comments from ECB President Trichet boosted the euro: Dollar Index -0.025, USDJPY +0.035, EURUSD -0.00016.

                Bearish factors included (1) euro supportive comments from ECB President Trichet who said "inflation rates are durably above the price stability target," which nearly cements an April interest rate hike from the ECB, and (2) hawkish comments from ECB Council member Quaden who said a "moderate" increase in interest rates won't stifle the economic recovery.

                Bullish factors included (1) comments from St. Louis Fed President Bullard who said that policy makers should review halting the $600 billion QE2 asset-purchase program before its June completion because the economy may not require that much stimulus, and (2) stronger-than-e xpected US economic data on Feb personal spending and Feb pending home sales, which signals economic strength and is dollar supportive.

[setravis]

Wednesday, March 30, 2011...

•   The dollar index this morning is stronger with the dollar/yen +0.64 yen and the euro/dollar -0.21 cents. The dollar index yesterday finished slightly higher as rising European sovereign-debt risks and weakness in the yen outweighed the prospects of an ECB rate hike next week: Dollar Index +0.121, USDJPY +0.781, EURUSD +0.00258. The yen posted a 2-week low against the dollar.

                Bullish factors included (1) the action by Standard & Poor's to cut Portugal's sovereign credit rating to BBB-, the lowest investment grade, and to cut Greece's rating 2 grades to BB-, 3 levels below investment grade, on concern that new EU bailout rules will force both countries to renege on their debt obligations, and (2) comments from St. Louis Fed President Bullard who said the Fed might need to tighten monetary policy before the outlook for the global economy clears up later this year.

                Bearish factors included (1) hawkish comments from ECB Council member Makuch who said it is "highl y probable" that the ECB will raise interest rates next week, which would further strengthen the euro's interest rate differentials, and (2) the weaker-than-expected Mar US consumer confidence, which is dollar negative.

[setravis]

Thursday, March 31, 2011...

•   The dollar index this morning is lower with the dollar/yen -0.03 yen and the euro/dollar +0.84 cents. The dollar index yesterday finished weaker as a rally in stocks reduced the safe-haven demand for the dollar along with the prospects for the dollar's interest rate differentials to weaken further on the near certainty of an ECB interest rate hike next week: Dollar Index -0.131, USDJPY +0.418, EURUSD +0.00144.

                Bearish factors included (1) market expectations of an Apr 7 interest rate hike by the ECB, which will further strengthen the euro's interest rate differentials against the dollar, and (2) reduced safe-haven demand for the dollar as global stock markets rallied on increased economic optimism.

                Bullish factors included (1) weakness in the yen as Japan's quake crisis may prompt the BOJ to keep an overly easy monetary policy that will further weaken the yen's interest rate differentials against the dollar, and (2) euro negative comments from ECB Council member Bini Smaghi who said the risk of the European sovereign-debt crisis spreading to other EU nations is "not insignificant."

[setravis]

US Dollar Index...
The US Dollar Index retraced to test resistance, but is now weakening. Reversal below 76 would signal a decline to 71* — a bullish sign for gold. Twiggs Momentum holding below zero suggests the down-trend will continue.

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

[setravis]

Friday, April 1, 2011...

•   The dollar index this morning is stronger with the dollar/yen +0.56 yen to a 1-1/2 month high and the euro/dollar -0.05 cents. The dollar index yesterday settled lower after the euro strengthened when Mar Euro-Zone inflation unexpectedly accelerated: Dollar Index -0.261, USDJPY +0.241, EURUSD +0.00304.

                Bearish factors included (1) the unexpected jump in the Mar Euro-Zone CPI estimate to +2.6% y/y, a 29-month high which lifted the euro and bolstered the case for an ECB interest rate hike next week, and (2) the larger than expected decline in Mar German unemployment to its lowest level since 1992, which is euro supportive.

                Bullish factors included (1) concern the European sovereign-debt crisis may worsen after credit-default swaps on Portuguese government debt rose 13 bp to a record 579 bp while default swaps on Irish government bonds rose 8 bp to a 2-1/2 month high of 633 bp, and (2) the smaller than expected decline in the Mar Chicago purchasing managers index, which shows economic strength and is dollar supportive.