U.S. Dollar Advances as Traders Jettison Yields for Safety

The greenback was higher at the close of North American trade with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing 0.31% on the session. Another bought of heightened risk aversion swept over global markets as equities plummeted with the Dow, the S&P 500, and the NASDAQ closing lower by 0.76%, 0.81% and 0.89% respectively. Concerns over the ongoing debt crisis in Europe continued to mount as speculation that officials will be unable to reach consensus over a mechanism to stem contagion. At the same time, domestic debt concerns also weighed on investors as the August 2nd debt limit deadline quickly approaches.

Classic risk aversion flows dominated trade with the greenback and swissie advancing as trader sought refuge ahead of an EU summit scheduled for the July 21st. A daily chart shows the index rebounding ff the lower bound trendline of an ascending channel that has held the greenback since the April low. Moving forward the dollar may encounter some resistance with the 50 and 100 day moving averages hovering just above.

An hourly chart sees the greenback hold within an embedded ascending channel dating back to early June after a brief false break last week saw the index re-enter the formation with a break above the 38.2% Fibonacci retracement taken from the May advance at 9600. Today the dollar failed to break through the 23.6% retracement at 9660 where interim resistance now stands. A break here sees subsequent ceilings at 9715 and 9750. Support rests at 9620 followed by 9600 and 9580.

A look at the component currencies sees the dollar advancing against all its counterparts save the yen which remained well supported on haven flows as trader jettisoned higher yielding assets for lower-yielding “safer” holdings. The chart is highlighted by a 0.48% decline in the pound as traders dumped the sterling ahead of the BoE minutes set for release on Wednesday. The sterling, cited in today’s scalping report, is likely to remain under pressure as deteriorating domestic conditions continue to see officials back peddling on rates. Risk aversion flows saw traders abandon yields, weighing on the aussie which fell 0.43% in New York. Meanwhile the euro continued to drift ahead of the EU summit later this week where officials will attempt to calm markets that have seemingly turned on the single currency.

Tomorrow’s economic docket provides an update on the ailed housing sector with June housing starts and building permits on tap. Housing starts are expected to climb by 2.7% m/m, easing from a previous gain of 3.5%, while permits are seen falling 1.5% m/m. The data risks fueling ongoing concerns about the US recovery and could see continued flows into haven assets on a weaker-than-expected print, further supporting the greenback.

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Written by Michael Boutros, Currency Analyst for DailyFX.com

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