Long Live the Dollar- Index Breaches Key Fibonacci Resistance

The greenback was sharply higher at the close or North American trade with the Dow Jones FXCM Dollar Index (Ticker:USDollar) surging 0.95% on the session. Unusually low demand on a German bond auction today triggered a substantial risk sell-off as concerns over the sustainability of the Euro region prompted investors to jettison risk across asset classes in favor of lower yielding haven assets like US Treasuries and the dollar. Mixed US data at the open did little to support risk appetite with personal spending and non-defense capital goods orders missing estimates with a print of 0.1% and -1.8% respectively. Stronger-than-expected prints on personal income and durables goods orders were not enough to reverse the day’s momentum however with the Dow, the S&P, and the NASDAQ closing sharply lower by 1.58%, 1.71%, and 2.00% respectively. The losses mark the fifth consecutive day of declines for the Dow, with the S&P off for a sixth consecutive day.

The greenback soared through our initial topside target at the 23.6% Fibonacci extension taken from the June 2010 and November 2010 crests at 9970 early in the session. A close above this level bodes well for the dollar with medium-term targets now eyeing the October 4th high at 10,130. A sharply sloped daily relative strength index also supports our bullish dollar outlook with the oscillator breaching RSI resistance on its way passed 9970. In the interim however, the dollar is likely to come off amid thin holiday trade conditions before commencing with its advance.

An hourly chart shows the index breaching the 61.8% Fibonacci extension taken from the August 1st and October 27th troughs at 9946 before topping the key psychological level at 10,000. Interim resistance now holds at 10,030 with a breach eyeing topside targets at the 76.4% Fibonacci extension at 10,064 and the 2011 high at 10,130. Support now rests at the 10,000-mark with subsequent floors seen at 9946, 9900, and the 50% extension at 9850.

The greenback advanced against all four component currencies highlighted by a 1.19% advance against the Australian dollar. The high yielder continues to take the brunt of the recent sell-off in risk with the AUD/USD pair off by nearly 3% this week as traders continued to seek haven in the perceived safety of the reserve currency. The Japanese yen was the top performer of the lot, albeit with a loss of 0.47% against the dollar. The USD/JPY pair continues to drift higher as intervention concerns and an extremely tight trading range saw traders unwind short positions, with the pair climbing nearly 0.60% so far this week. The euro saw the highest volatility today with the single currency moving a full 113% of its daily average true range to close the session with a loss of 1.09%.

The economic docket is empty for the remainder of the week with US markets closed tomorrow in observance of Thanksgiving. Look for broader market sentiment to steer dollar price action with the index likely to pare recent gains amid thin holiday trading. Despite the expected pullback which we cited in yesterday’s USD Trading Report, the medium to long-term bias on the reserve currency remains bullish.

--- Written by Michael Boutros, Currency Analyst with DailyFX.com

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