US Dollar Index Slides Ahead of Jackson Hole as Stocks Surge

The greenback was markedly lower at the close of North America trade with the Jones FXCM Dollar Index (Ticker: US Dollar) falling 0.53% on the session. The losses come on the back of a stellar performance in US equities that saw the Dow, the S&P, and the NASDAQ surge 2.97%, 3.43%, and 4.29% respectively. Markets shrugged off weaker than expected print on new home sales and the Richmond Fed manufacturing index as improved sentiment saw investors go back on the hunt for yields. A sudden sell-off in afternoon trade was triggered by reports of a 5.8M earthquake striking the North East. But after city skyscrapers ceased to sway, markets pared losses to close at session highs. Although the dollar was weaker on the session, the index remains well supported above the key 61.8% Fibonacci extension taken from the June and November 2010 crests at 9380. As noted in yesterday’s USD Trading Today Report, the 9455 mark continues to be an area of congestion for the greenback, with the dollar likely to re-test this level later in the week. We continue to eye the 9380 mark as the threshold which if broken, could see substantial dollar losses.

The index remains within a well defined descending channel dating back to August 5th and continues to range between the 61.8% and 50% Fibonacci extensions taken from the July 12th and August 8th crests at 9410 and 9460 respectively. A break below interim support risks further losses for the dollar with subsequent floors seen at 9380 and the 76.4% extension at 9345. A breach above 9460 eyes topside targets at the 38.2% extension at 9513, 9550 and the 23.6% extension at 9580.

The dollar fell against all the component currencies, highlighted by 1.13% decline against the aussie which continues to be the best performer of the lot as investors chase yields amid improving risk sentiment. However all eyes remain fixated on Friday’s Jackson Hole Economic Policy Symposium where market participants will be eagerly anticipating remarks from Fed Chairman Ben Bernanke. The yen posted the smallest advance against the greenback, climbing a modest 0.19% despite moving 76.60% of its daily average true range. Investors remain wary of taking on long yen positions here as Japanese officials continue to closely eye the FX markets in response to the yen’s rapid appreciation over the past two months.

Tomorrow’s economic docket is highlighted by the July durable goods orders and the June house price index. Orders are called higher with estimates looking for a print of 2.3%, up from a previous read of -2.1%. 2Q home price purchase index is seen falling by 0.5% q/q, a slower pace than the -2.5% q/q read seen in 1Q, while on a monthly basis the index is expected to print at 0.1% after a 0.4% m/m read in May. Aside from extraneous outliers on the print, the dollar is likely to hold its present range heading into Friday’s Jackson Hole summit as markets hold their collective breath in hopes that Bernanke will deliver comforting news to investors.

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Written by Michael Boutros, Currency Analyst for DailyFX.com

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