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U.S. Dollar Continues Surge as Global Sell-off Accelerates

U.S. Dollar Continues Surge as Global Sell-off Accelerates

2011-09-22 14:01:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Fundamental Headlines

Initial Jobless Claims in U.S. Fell Last Week – Bloomberg

Stocks, Commodities Slump on Fed Outlook, Bank Downgrades; Treasuries Gain – Bloomberg

China’s Manufacturing Slows as U.S., Europe Stall – Reuters

European Stocks Sink – WSJ

Fed Launches New Stimulus – WSJ

European Session Summary

European markets mirrored the price action exhibited late in the North American session yesterday, a disparaging sign for higher yielding and risk-correlated assets. European equity markets were down as much as 5%, at the time this report was written, while U.S. equity market futures pointed towards a much lower open, as much as 3% lower. Similarly, on the surge in concern over global growth, NYMEX WTI crude oil was trading over 5% lower as well. The signal markets are giving is clear: risk-aversion is in full stride, and this is the beginning of a leg down across global financial markets.

The built-up expectations of another round of quantitative easing, in the form of another round of balance sheet expansion, were deflated quickly when the FOMC’s monetary policy statement was released shortly after 18:15 GMT. While there was a sharp but quick rally in higher yielding assets, such as the Australian Dollar, U.S. Dollar strength quickly ensued. Dollar strength has been essentially unabated since late in the North American trading session on Wednesday.

AUD/USD 1-minute Chart: September 22, 2011

U.S._Dollar_Continues_Surge_as_Global_Sell-off_Accelerates_body_x0000_i1029.png, U.S. Dollar Continues Surge as Global Sell-off Accelerates

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In the currency realm, the Australian Dollar was one of the worst performing currencies in the overnight, falling by over 2.7 percent, at the time this report was written. As the highest yielding major currency, the Aussie faces significant volatility when markets panic. Over the past three weeks, the AUD/USD has fallen by nearly 900-pips. The Aussie appeared to be rebounding just shortly ahead of the North American open, although further losses are on the horizon as the global economic climate continues to deteriorate.

EUR/USD 5-min Chart: September 21 to September 22, 2011

U.S._Dollar_Continues_Surge_as_Global_Sell-off_Accelerates_body_x0000_i1028.png, U.S. Dollar Continues Surge as Global Sell-off Accelerates

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The Euro was also hit hard by the Federal Open Market Committee’s decision yesterday. With the Federal Reserve shifting away from its policy to expand the balance sheet by buying assets with shorter durations, a potential funding problem exists for Europe. Liquidity remains a significant concern for European banks, and a glance at European financial shares suggests that institutions are allocating away from said assets. Accordingly, this necessarily suggests that participation in the European Financial Stability Facility will be questionable for weaker Euro-zone economies. If Germany is forced to bailout Europe alone, then the Euro remains exceptionally vulnerable in the coming days and weeks.

In terms of what the Federal Reserve will be doing, they announced that they would “extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.” Theoretically, a flattened yield curve should boost capital flow into the United States, as well as make the U.S. Dollar more appealing. Indeed, the flight to the U.S. Dollar today after this announcement provides evidence of the markets’ broad expectation of further appreciation.

Thus far, on Thursday, the Dow Jones FXCM Dollar Index is much higher, trading at 9961.91, at the time this report was written, after opening at 9876.99. The index has traded mostly higher, with the high at 9990.25 and the low at 9869.37.

24-Hour Price Action

U.S._Dollar_Continues_Surge_as_Global_Sell-off_Accelerates_body_Picture_7.png, U.S. Dollar Continues Surge as Global Sell-off AcceleratesU.S._Dollar_Continues_Surge_as_Global_Sell-off_Accelerates_body_Picture_4.png, U.S. Dollar Continues Surge as Global Sell-off Accelerates

Key Levels: 13:00 GMT

U.S._Dollar_Continues_Surge_as_Global_Sell-off_Accelerates_body_Picture_1.png, U.S. Dollar Continues Surge as Global Sell-off Accelerates

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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