USD Graphic Rewind: Dollar Index Touches Fresh 2011 Low on Yen Spike
The dollar index closed strongly higher on Wednesday as global equities continued to sell-off amid growing concerns of a full-on nuclear disaster unfolding in Japan as a result of the devastating earthquake and tsunami. As investor focus remains firmly locked on developments in Japan their appetite for risk is non-existent and they are searching for safety in safe haven assets, which include USD holdings. Also helping the buck is the pull-back in US equities which is lifting USD holdings as well as US investors pulling their money from overseas investments and converting that back into USDs.
Over-night has been a completely different story, as we can clearly see in the above chart very soon after the close of US trade, during the thinnest liquidity period of the day, the dollar index dropped to fresh 2011 lows at 76.07 as the yen was propelled to record highs against the buck. The yen appreciated a massive three-big figures from the 79.50 region to post a record high just below 76.50 and thin liquidity exacerbated moves. The move was retraced relatively quickly and the dollar index stabilized around 76.55 but remains moderately lower on the day. Price action through the rest of the over-night session was relatively subdued with many shocked by the moves in the yen.
Looking to the day ahead, it will be interesting to see how price action plays out today and what the market makes of the spike lower in USDJPY and whether players decide to retrace back down to that low, filling the gap, or if now that low has been put in place the market will start to look to the upside in USDJPY. Our belief is that over-night price action can be discounted, to a degree, as whipsaw and the low is unlikely to be re-tested, we are looking to build a meaningful medium/long-term position in USDJPY in anticipation of significant depreciation of the yen.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.