USD Graphic Rewind: Doji Close in Dollar Index Has Bearish Implications
The dollar index was unable to hold onto any of its hefty intraday gains and ended up closing flat on the day Tuesday. The choppy and at times whipsaw price action throughout the day yesterday kept currency traders at bay and led most to seek refuge in safe have assets. The dollar was unable to capitalize on these flows since, as we have mentioned previously, the buck has lost, for now, its safe haven status. The other key thing to note yesterday was traders inability to let the euro sink, after falling for much of the Asia and Europe session North American traders viewed this as an opportunity to establish fresh long positions in the euro and erased the 150 point drop witnesses in Eur/Usd. With the Fed affirming its commitment to its “extended period” language and only moderately lifting its outlook for the economy and the ECB threatening to raise rates imminently the market is getting behind the euro at the cost of the buck, something we believe is a mistake.
It is our opinion that a rate hike by the ECB now raises borrowing costs for the most indebted nations who are already struggling to finance their debt. This could have catastrophic effects on the entire euro-region and ultimately deepen the debt crisis in the EMU. Meanwhile in the US economy things continue to brighten, albeit its slowly but at a steady pace illustrated by the Fed’s incremental raising of their outlook for the economy. If you place the Euro-zone and US economies side by side there is no question in my mind which is in better shape today, and which has better prospects for the coming months.
Turning back to the dollar index, yesterday’s Doji close certainly has bearish implications, however, we are cautious in suggesting further losses are in the offing today since price action has been anything but ordinary amid the ongoing crisis in Japan. If markets get moving again today like yesterday we urge caution so as not to get caught in whipsaw price action. Therefore we suggest standing aside for now.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.