What drives the Dollar
13 May 2011
TECHNICALS
MONTHLY CHART
The market has been recently driven by a powerful bull structure of a bull falling wedge.
But that is being tested now rather severely.
Note the pull back to test the top diagonal of the wedge.
And the re-penetration of the support from the Prior High…
( NB the Fibonacci retracement 38.2% has yet to break)
DAILY CHART
In the short-term, the market has broken the rising diagonal, from the beginning of the year, and the support from Prior Highs at 1.4517, 1.4281 and 1.4248.
It looks poor short-term but the influence of unbroken medium-term bull patterns (above) should warn the bears against premature selling…certainly there is no clear Top formation in place yet….
FUNDAMENTALS
The Dollar staged a
lightening recovery towards the end of last week, especially against the Euro,
driven by three main events:
1.Anxieties
about the Euro zone Sovereign debt crisis intensified as speculation continued
to grow that Greece might yet be forced to restructure her debts,
2.The
ECB held interest rates unchanged, with Trichet failing to provide guidance
about the timing of any future rate increase, and
3.Anxieties
emerged about the health and durability of the Global recovery.
Although the Euro
zone debt crisis has been running for over a year, the Euro had until recently,
enjoyed a strong rally against the Dollar, helped by strong Euro zone/German
data and the advent of an ECB tightening cycle. Whereas the Dollar seemed undermined
by the inability of Congress and the Administration to reach agreement about a
deficit reduction plan.
However, with oil
prices also enjoying a strong rally recently, concerns about Chinese inflation
had begun to dog the global markets. Particularly when further Chinese rate
hikes designed to restrain inflation and cool the economy looked likely.
The fear was if the
Chinese economy cooled too much, the Global economic recovery could be damaged.
At the same time, the US published a weaker than expected ISM non-manufacturing
survey and higher than expected unemployment rate, which seemed to fit the
emerging pessimistic view of renewed economic weakness.
But why then did the Dollar enjoy such a strong recovery?
Until a replacement is found, the Dollar remains the global reserve currency, so although US data cast some doubt over the US recovery last week, the Dollar fulfilled its safe have role, as traders became nervous about the Euro zone sovereign debt crisis once more.
So far the Euro zone crisis has claimed three victims:
Of these Greece was the first to be rescued, but she is far from out of trouble. There is talk in the markets and in the news that a debt restructuring is imminent - although denied. And Ireland is resisting pressure to raise her corporate tax rates, in exchange for lower rates on her rescue package.
In short the EU/Euro zone has managed this crisis poorly. The Euro had amazingly appeared to decouple its self from these worries and rallied against the Dollar over recent weeks, as the ECB had begun to talk tough on inflation; raising rates at the April meeting, but the May meeting and Trichet press conference left traders a little confused about the next policy move sending the Euro into a reversal.
So although the US has a burgeoning debt crisis of her own, which was recently acknowledged by the rating agency S&P, that is for now being put to one side as traders/investors/analysts still judge a US debt default is highly unlikely, whereas the relatively young Euro zone is still seen as a possible candidate for failure.
The Dollar’s current strength is probably a correction, but until confidence in the economic recovery and Euro zone’s debt management returns, the Dollar could rally a little further.
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