USD Graphic Rewind: Dollar Index Keeps Climbing as Euro Sinks; Maintain Bullish Outlook
Created using Bloomberg
The dollar index continues to provide signs of encouragement to those of us who have been calling for a basing out of the dollar index and a period of US dollar strength. On going weakness in global equities and commodities is helping to propel the buck higher even as the euro sinks amid a resurgence of EMU debt related fears. These two catalysts combined has been helping the index climb past initial resistance levels and confirm a short-term base. As we near the 76.00 level the index faces it first major hurdle, between the 76.00 and 77.00 levels trade may turn more choppy and direction more uncertain but if the index can push through this region then we can look higher toward 79.00 and even the psychologically important 80.00 level.
We continue to watch longer-term charts, weekly and monthly charts, as we search for longer-term confirmation of the dollar rebound. Since we hold a bullish USD outlook for 2011 against almost all major currencies we are watching this period of strength in the buck very carefully, cautiously optimistic that our forecasts will be correct.
Just to remind readers we see fundamentals as being the key driver of price action over the entirety of 2011, with US fundamentals continuing to improve at a slow but steady rate while the EMU is plagued by a debt crisis that wont go away, Japan suffers at the hands of a natural disaster, only the UK looks on a similar path to the US. The Federal Reserve has been much more accommodative in its policy and attempts to continue supporting the recovery and this has hurt the buck early in 2011 while the ECB with its inflation-driven mandate has been more eager to tighten policy. This we believe we also finally be overlooked since when the Fed does start tightening policy the potential upside for the buck is much greater and any further tightening by the ECB will only serve to hurt its weaker nations more, worsening the debt crisis. Therefore, as the market comes to terms with the fact that yield differentials aren’t the be all and end all and refocuses onto fundamental strength the USD is well positioned to make significant gains.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.