USD Posts Sharpest Decline of Month on Monster Dow Jones Rally

The greenback fell for a third consecutive day in North American trade with the Dow Jones FXCM Dollar Index (Ticker:USDollar) plummeting 1.08% on the session. News of a coordinated effort by global central banks to boost liquidity measures, stronger than expected US data, and a move to ease policy in China converged to spark a massive rally with equity markets surging across the board. US stocks were sharply higher at the close with the Dow, the S&P, and the NASDAQ soaring 4.24%, 4.33%, and 4.17% respectively.

Although the coordinated effort by the Fed, ECB, BoE, BoC, BoJ, and the SNB eased immediate concerns over a looming credit crunch, the move does little to address the underlying solvency issue that has continued to weigh broader market sentiment. The fact that these central banks have taken this bold step also suggests that officials see a growing risk of the possibility of another credit event as institutions look to shield themselves from the looming debt threat in Europe. Accordingly today’s rally is widely expected to taper off heading into the close of the week with investors looking ahead to Friday’s non-farm payroll report which is expected to show the addition of 125K jobs in the month of November.

A glance at a daily chart shows the dollar breaking below the 9900 support level noted in yesterday’s USD Trading report. The index now risks further losses with a close below 9830 noting stronger support lower at the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745. Resistance now stands at 9900 backed by the 23.6% extension at 9970. A sharply sloped RSI break below support at the 57 mark also suggests the index could continue to face some headwinds as the risk rally subsides.

An hourly chart shows the severity of today’s price action with the index promptly reversing a topside break above channel resistance before rebounding off the 9800 support level to close back within the confines of the descending channel formation which has held since the start of the week. Interim support rests at 9800 with a break below eyeing subsequent floors at the 38.2% Fibonacci extension taken from the August 1st and October 27th troughs at 9754 and 9700. A break above interim resistance at the 50% extension at 9850 eyes topside targets at 9900 and the 61.8% extension at 9946.

The greenback fell against all four component currencies again today, highlighted by a 2.85% declines against the Australian dollar. As noted in today’s Winners / Losers report, the aussie has posted the largest three day rally in three years with an advance of 3.82% this week alone. The run-up in risk appetite over the past few days has been profound with traders flocking into higher yielding assets as debt concerns temporarily eased. The worst performer of the lot was the Japanese yen which advanced 0.51% against the greenback as dollar losses outpaced those of the yen. The yen is lower against all its major counterparts save the dollar as a shift in broader market sentiment saw investors jettison lower yielding assets in favor of risk.

Tomorrow’s economic docket is highlighted by construction spending, ISM prices, and ISM manufacturing PMI. Construction spending is expected to have expanded in the month of October by 0.3%, a slight improvement from the 0.2% print seen a month earlier. November ISM manufacturing PMI is also expected to improve with consensus estimates calling for a print of 51.7, up from a previous read of 50.8, with ISM prices seen climbing to 45.0 from 41.0. Despite today’s substantial rally in risk assets, markets are likely to consolidate over the next 24-hours ahead of Friday’s much anticipated non-farm payroll report.

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

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