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U.S. Dollar Regains Footing On Risk Aversion, Outlook Remains Bullish

U.S. Dollar Regains Footing On Risk Aversion, Outlook Remains Bullish

2011-05-20 16:02:00
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

9654.87

9682.57

9604.93

0.36

93.49%

U.S._Dollar_Regains_Footing_On_Risk_Aversion_Outlook_Remains_Bullish_body_ScreenShot022.png, U.S. Dollar Regains Footing On Risk Aversion, Outlook Remains Bullish

The Dow Jones-FXCM U.S. dollar index bounced back from a low of 9604.93 following a shift in trader sentiment, and the greenback may appreciate further over the following week as fears surrounding the European debt crisis intensifies. The USD is 0.36% higher on the day after moving 93% of its average true range, but the rally appears to be giving out as the relative strength index falls back from a high of 70. In turn, the U.S. dollar index looks as though it will consolidate going into the end of the week, while the near-term outlook for the greenback remains fairly bullish as it continues to trade within an upward trending channel.

As European policy maker struggle to contain the risk for contagion, the risk for fears of a Greek default should continue to heighten demands for the greenback, and the near-term rally in the reserve currency looks as though it will accelerate going forward as the flight to safety gathers pace. As the U.S. dollar index finds near-term support around 9600.00, the USD should continue to march towards 9800.00 in the days ahead, and risk sentiment will continue to dictate price action for the greenback as long as the Federal Reserve maintains its zero interest rate policy.

U.S._Dollar_Regains_Footing_On_Risk_Aversion_Outlook_Remains_Bullish_body_ScreenShot023.png, U.S. Dollar Regains Footing On Risk Aversion, Outlook Remains Bullish

Indeed, the rebound in the dollar index was led by a 0.86% decline in the Euro, and the single-currency certainly remains at risk of facing additional headwinds over the near-term as the EU struggles to restore investor confidence. As the European periphery face record-high financing costs, with Fitch Ratings cutting its credit rating for Greece to B+ from BB+, the European Central Bank may have little choice but to delay its exit strategy further. In turn, ECB President Jean-Claude Trichet may continue to soften his hawkish outlook for monetary policy, and exchange rate is likely to weaken further as interest rate expectations deteriorate. However, market participants continue to see borrowing costs in Europe increasing by nearly 100bp over the next 12-monts according to Credit Suisse overnight index swaps, and speculation for higher interests could help to prop up the single-currency as investors weigh the prospects for future policy.

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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