As was suggested yesterday, the dollar index came under some pressure as global equities continued to perform well. However, this pressure was mitigated by a volatile euro which led to the dollar actually being bid through most of North American trade despite regional equity performance. As the session wore on the concerns regarding the debt crisis weighed on investor sentiment and US markets ended in the red. The key driver of this move was news that China is evaluating its euro holdings, including euro-denominated bonds from heavily indebted countries and would carefully consider if further bond purchases were in China's interest.
Over-night various Chinese agencies have scrambled to counter these reports which allowed for a euro bounce and Asian equities - which started shakily - to push higher. As we can see in the above graph the dollar sell-off has accelerated and the rapid rise of the euro going into European trade looks a tad suspicious.
Looking ahead, if equity markets continue to perform well the dollar index could continue to be pressured as the euro rebounds into higher ground. However, we maintain that the underlying safe haven bid will cap dollar index losses.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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