Consolidation had been the name of the game over the past few days in the Dow Jones FXCM Dollar Index (ticker: USDollar) as some pondered if the index merited further gains, others watched as the EMU continued to struggle with its debt crisis while the very forward thinking already started positioning for yesterday’s highly anticipated event risk. It had caused some to question if the dollar would in fact be making further gains toward the 10,000 level or if the rally had petered out. We got our answer.
The Fed elected to introduce its Operation Twist, as was widely expected, to try push down long-term rates and boost borrowing and liquidity in an effort to stimulate the economy. However, its downbeat outlook for the US and global growth mitigated the positive effect of new stimulus. Additionally, the Fed’s previous efforts to stimulate the economy had largely resulted in bank and corporations borrowing money at low rates to boost their own balance sheets and hoard cash at unprecedented levels; very little trickled down to hiring or investing in new technologies as the Fed had hoped. As a result the market was not all that impressed by the Fed and promptly exited riskier assets giving the buck the boost it had been waiting for to lift it out of the consolidation quagmire and toward fresh highs.
With a double bottom now confirmed on daily charts and the neckline well and truly broken we feel more confident than ever forecasting continued gains for the buck as the last possibly hurdle for extended greenback gains has been overcome. We had mentioned in past analysis that if the Fed had embarked on a massive round of QE3 then the buck would have been significantly weakened, however, with this not being the case the dollar should continue to rise as events conspire for its success.
Written by Jonathan Granby, DailyFX Research Team