US Dollar Strength May Be Tempered By Near-Term Resistance

11/18/2008 10:40 am EST

Focus: FOREX

For weeks, we've been discussing how risk appetite, or the lack of it, has been driving price action throughout the forex markets to the benefit of the lowest-yielding major currencies: The US dollar and Japanese yen. The strength of the greenback has been all the more surprising given the dismal status of the US economy, but since the currency has managed to hold on to its status as a "safe haven" asset, fundamentals frankly do not matter at this juncture.

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Nevertheless, economic indicators are still worth watching since they have been impacting the US stock markets and will likely play into future rate decisions by the Federal Reserve.

Following comments from Fed chairman Ben Bernanke, who said on Friday that "monetary policy actions have not resolved the ongoing strains in financial markets, including interbank funding markets.Central bankers and other policymakers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy." Credit Suisse overnight index swaps are fully pricing in a 50bp reduction on December 16. News on November 19 may shake up these forecasts, though, as US CPI and the Federal Open Market Committee (FOMC) meeting minutes from October 29 will both hit the wires. At 8:30 ET, CPI is anticipated to plunge 0.8% during the month of October, which would mark the sharpest drop since 1949, while the annual measure is projected to slip to a five-month low of 4.1%. However, the FOMC meeting minutes at 14:00 ET could draw more attention, especially if they highlight the downside risks to growth and declining inflation expectations. Since risk trends have been the primary driver of price action lately, it will likely be best to watch for the stock market's reaction as a pessimistic turn in sentiment could lead equities lower, and thus lead the US dollar higher given their negative correlation.

From a technical perspective, the US dollar's trade-weighted index faces heavy resistance at 87.90/88.00, where the 78.6% Fib of 92.63-70.67 looms. Meanwhile, EUR/USD has had difficulty breaking below 1.2400, suggesting that the US dollar may not be able to make significant headway in the near term.

By Terri Belkas, Currency Strategist, DailyFX.com

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