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USD Index Points To Additional Strength, Yen Poise To Weaken Further

USD Index Points To Additional Strength, Yen Poise To Weaken Further

David Song, Strategist

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9921.14

9931.27

9872.68

0.36

90.93%

USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot040.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.36 percent higher from the open after moving 91 percent of its average true range, and the bullish divergence in the 30-minute relative strength index instills a bullish outlook for the greenback as it breaks out of the downward trending channel from earlier this month. In turn, the rebound from 9,837 should continue to gather pace, but the reserve currency may face whipsaw-like price action later today as the Federal Open Market Committee interest rate decision takes center stage. Beyond the rate decision, the first batch of interest rate forecast will be closely watched across the financial market, but the Fed’s fundamental assessment of the world’s largest economy may play a greater role in driving price action as investors weigh the prospects for future policy.

USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot041.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further

As we look for a higher high in the USDOLLAR, the FOMC rate decision could pave the way for a major rally in the reserve currency as the more robust recovery dampens the central banks scope to push through another large-scale asset purchase program. As economic activity gradually gathers pace, we anticipate the Fed to strike an improved outlook for the region, and the central bank may continue to soften its dovish tone for monetary policy as the risk of a double-dip recession subside. However, Chairman Ben Bernanke may keep the door open to further expand the balance sheet in light of the ongoing weakness in the housing market, and the USD may come under pressure should the committee float the idea of purchasing mortgage-backed securities (MBS) to stimulate home purchases.

USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot042.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further

The greenback rallied against all four components on Wednesday, led by a 0.75 percent decline in the Japanese Yen, and the low-yielding currency may weaken further over the near-term as market participants increase bets for a currency intervention. As the Bank of Japan refrains from taking additional steps to shore up the ailing economy, there’s speculation that the Ministry of Finance will once again step into the FX market to stimulate growth, but Japanese policy makers may put additional pressure on the central bank to further expand its asset purchase program as the fundamental outlook for the region deteriorates. As BoJ Governor Masaaki Shirakawa continues to highlight the threatens of a stronger Yen, speculation for another currency intervention will certainly be a major theme in 2012, and the central bank may have little choice but to expand its balance sheet further as it lowers its growth forecast for the world’s third-largest economy.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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