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U.S. Dollar Benefits From Risk Aversion, Index Eyes 9800

U.S. Dollar Benefits From Risk Aversion, Index Eyes 9800

2011-05-13 15:52:00
David Song, Currency Strategist
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DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9647.83

9653.33

9563.96

0.41

112.02%

U.S._Dollar_Benefits_From_Risk_Aversion_Index_Eyes_9800__body_ScreenShot047.png, U.S. Dollar Benefits From Risk Aversion, Index Eyes 9800

The Dow Jones-FXCM U.S. dollar index bounced back from 9563.96 to extend the advance from earlier this year, and the greenback should appreciate further over the near-term as currency traders scale back their appetite for risk. The index is 0.41% higher during the North American trade after moving 112% of its average true range, and the USD may continue to retrace the decline from the previous month as the Federal Reserve plans to conclude its easing cycle going into the second-half of the year. As the central completes the additional $600B in quantitative easing, the current wave of risk aversion will continue to bear down on carry interest, and the near-term rebound in the reserve currency should accelerate as it benefits from safe-haven flows. However, as the index continues to hold below the previous day’s high (9658.88), the three-day rally may taper off going into the end of the week, and we may see a small correction as the relative strength index approaches oversold territory.

U.S._Dollar_Benefits_From_Risk_Aversion_Index_Eyes_9800__body_ScreenShot046.png, U.S. Dollar Benefits From Risk Aversion, Index Eyes 9800

Three of the four components weakened on Friday, led by a 0.93% drop in the Australian dollar, while the British Pound extended the decline from earlier this week to reach a fresh monthly low of 1.6183. However, as consumer prices in the U.K. are expected to expand at an annualized pace of 4.1% in April, the rebound in price growth could heighten speculation for a rate hike by the Bank of England, but currency traders may show a muted to reaction to the consumer price report as the central bank is scheduled to release its policy meeting minutes on May 18. As the BoE adopts a hawkish outlook in its inflation report, the statement could show a growing shift with the MPC, and the vote count could reveal an imminent risk for a rate hike in the second-half of the year as the central bank expects price growth to reach 5% in 2011. In turn, the GBP/USD may regain its footing over the following week, and the DJ-FXCM U.S. dollar index may consolidate before making a run at 9800.00 as it continues to retrace the decline from the previous month.

Join us to discuss the outlook for the major currencies on the DailyFXForums

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

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