USD Finds Support, FX Traders Curb Bets For Another Yentervention

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.74 percent lower from the open after moving 86 percent of its average true range, but the reserve currency appears to be regaining its footing as the 30-minute relative strength index rebounds from a low of 26. As the oscillator bounces back from oversold territory, it seems as though the index has carved out a higher low, and the greenback looks poised to extend the rally from 9,454 as it appears to have found near-term support around 9,950. In turn, we should see the USD fill in the gap from the open, and the pair looks poised to post a fresh monthly high as investor confidence remains frail.

Indeed, the Organization for Economic Cooperation and Development struck a dour outlook for the world economy as European policy makers struggle to contain the sovereign debt crisis, and hopes surrounding the EU meeting scheduled for Tuesday may be short-lived should the group fail to meet on common ground. As the USD bounces back from the 61.8 percent Fibonacci retracement around 9,947, we still see the greenback making a run at the 78.6 percent Fib around 10,117, and the reserve currency remains poised to make a higher high as we see bullish crossovers in the moving averages. In turn, the recent pullback could serve as a great buying opportunity for the USD, and the reserve currency may gain ground in the following month as the outlook for 2012 turns increasingly bleak.

Three of the four components advanced against the greenback on Monday, led by a 2.16 percent rally in the Australian dollar, while the Japanese Yen weakened across the board following the rise in risk sentiment. Indeed, the recent depreciation dampens the risk of another intervention, but it seems as though the Bank of Japan will take additional steps to shield the economy as central bank Governor Masaaki Shirakawa turns increasingly cautious towards the region. As the BoJ resists calls to intervene in the currency market, we should see the central bank expand its credit/asset purchases, but the Ministry of Finance may continue to sell the local currency in order to strengthen the slowing recovery. Nevertheless, market participants appear to be scaling back bets for another Yentervention as the DailyFX Speculative Sentiment Index narrows to 2.27, but shift in retail positions is likely to be short-lived as we expect market sentiment to weaken further over the near-term.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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