technical alert

US Dollar Falls Against the Euro as Wall St Races Higher

Thursday, 13 November 2008 22:26:28 GMT  |  Ilya Spivak, Currency Analyst

The US Dollar plunged -2.1% against the Euro as stocks surged to close the Wall St trading day with a nearly 7% gain. The greenback has been closely correlated with stock performance in recent weeks as investors flocked to the dollar as a safe-haven asset amid sweeping flight from risk. Because US policymakers were the first to address the current downturn with interest rate cuts and fiscal stimulus, traders are betting that US will lead the global recovery. An interest in US Treasury bonds has also helped the dollar higher: traders scared out of risky assets first by the credit crunch and now by fears of looming global recession have sought refuge in long-term US government debt (and thereby fueled demand for dollars). US Treasuries are considered a nearly "risk-free" asset because the only meaningful threat to the investment would be a collapse of the US government itself.

The outflow of funds from stocks and their simultaneous inflow into US Dollars has forged a strong 93% correlation between EURUSD and the MSCI World Stock Index (see chart below). As market conditions begin to normalize, we expect an upward correction in oversold risky assets, leading both stock prices and EURUSD to higher ground. The technical outlook is supportive, with the Euro consolidating after a break above a Falling Wedge bullish reversal chart formation and poised for upside momentum.

EURUSD Spot vs. MSCI World Stock Index:


Source: Bloomberg

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