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US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

2011-12-22 03:40:00
Ilya Spivak, Sr. Currency Strategist
Share:

Major Currencies vs. US Dollar

(week-to-date % change)

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_5.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Tight correlations between most major currency pairs and the S&P 500 suggest broad-based sentiment trends remain firmly in control of FX market price action, with the Eurozone debt crisis still the issue at the forefront (USDJPY remains an exception, with intervention fears insulating the pair from larger market themes). As we suspected last week, this has produced US Dollar weakness against most of the benchmark currency’s leading counterparts as seasonal flows step into the driver’s seat. More of the same is likely ahead.

The headwinds bearing down on market confidence are unlikely to intensify between now and January. The Eurozone crisis – while certainly unresolved – is unlikely to get materially worse as the bond rollover and auction calendars thin out while political leaders retreat from the spotlight. The downgrade of a large European sovereign remains an off-chance risk, but the staff at Fitch, Moody’s and Standard & Poor’s are probably just as eager to get some rest as anyone else despite recent grumbles, meaning any serious ratings actions are likely to wait until 2012. Likewise, worries about the slowing global economy stand a relatively small chance of being materially compounded as the economic data docket turns increasingly sparse. Indeed, most of the truly headline-grabbing releases on tap this month are already out of the way.

On balance, this means traders attention will remain on balancing their books and packing up for vacation, preferring not to force any major moves until January. Keeping in mind the ferocity of recent volatility however, it is probably fair to say that traders are jittery enough to show a preference for taking profits on their risk-aversion bets rather than letting them tread water for the next 7 trading days, opting not to run the risk of being caught on the wrong side of an unexpected headline (especially as thinning liquidity threatens to amplify the swings in price action). All told, this means the greenback will at best find itself in consolidation mode vis-à-vis the majors, though further corrective weakness seems reasonably probable.

EURO

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_6.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

BRITISH POUND

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_7.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

JAPANESE YEN

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_8.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

CANADIAN DOLLAR

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_9.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

AUSTRALIAN DOLLAR

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_10.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

NEW ZEALAND DOLLAR

US_Dollar_Weakness_Likely_to_Carry_into_Year-End_Rally_to_Resume_in_2012_body_Picture_11.png, US Dollar Weakness to Carry into Year-End, Rally to Resume in 2012

Source: Bloomberg

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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