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U.S. Dollar Weakness To Be Short-Lived On Oversold Signal

U.S. Dollar Weakness To Be Short-Lived On Oversold Signal

2011-05-16 15:07:00
David Song, Currency Strategist

DJ FXCM Dollar Index





Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index






U.S._Dollar_Weakness_To_Be_Short-Lived_On_Oversold_Signal_body_ScreenShot050.png, U.S. Dollar Weakness To Be Short-Lived On Oversold Signal

The USD struggled to hold its ground on Monday, with the Dow Jones-FXCM U.S. dollar index paring the overnight advance to 9695.68, and the reserve currency may face additional headwinds throughout the North American trade as currency traders increase their appetite for yields. The dollar index is down 0.47% on Monday after moving 88% of its average true range, and the dollar may continue to lose ground throughout the day as the rebound in risk sentiment gathers pace. In turn, the gauge may fall back towards 9575.00, but the decline should be short-lived as the index maintains the upward trending channel from earlier this month. As the 30-minute relative strength index crosses into oversold territory, we may see a correction emerge over the next 24-hours of trading, and the index should continue to work its way towards 9800.00 as it retraces the decline from the previous month.

U.S._Dollar_Weakness_To_Be_Short-Lived_On_Oversold_Signal_body_ScreenShot051.png, U.S. Dollar Weakness To Be Short-Lived On Oversold Signal

Three of the four components rallied against the greenback on Monday, led by a 0.84% advance in the Euro, but the single-currency certainly remains at risk of facing additional headwinds over the near-term as the sovereign debt crisis continues to bear down on market sentiment. As European finance ministers convene in Brussels for the next two-days in order to nail out the last details of the European Stability Mechanism, there will certainly be a great deal of expectations for the group to deliver a creditable solution, but the EU may use this opportunity to merely buy more time as they maintain a more of a reactionary approach in dealing with the ongoing turmoil within public finances. As the risk for contagion intensifies, the European Central Bank may have little choice but to delay its exit strategy further, and the near-term rally in the single-currency is likely to be short-lived as the Governing Council continues to soften its hawkish tone for monetary policy. In turn, the EUR/USD should revert back to former resistance around 1.4000 as it searches for near-term support, but we may see a test of the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60 as it appears to be carving out a head-and-shoulders top in May.

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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