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Dollar Strength Weighing on Stocks

James Hyerczyk from ForexHound.com at 12/11/09


The threat of higher interest rates because of the better than expected U.S. Retail Sales Report, helped knock the stock index futures off their highs. Traders, however, did not give up on the long side and bought a late morning dip. The reversal of the carry trade, where investors sell stocks to pay back borrowed Dollars, could trigger a sharp sell-off late in the session. Holding above 1106.00 will be a sign of strength.

March Treasury Bonds and Treasury Notes are feeling downside pressure following the release of this morning’s bullish retail sales report. Traders are selling Treasuries to adjust for the possibility of a hike in interest rates by the Fed sooner than previously estimated.

February Gold failed this morning in its attempt to retrace this week’s sell-off. The stronger Dollar is the catalyst behind today’s weakness. The chart indicates that a test of the major 50% retracement level at $1107.40 is likely. Watch for a technical bounce.

March Crude Oil failed to hold the .618 support level at 73.63. Mixed equities, a stronger Dollar and bearish supply/demand fundamentals are contributing to the weakness.

The U.S. Dollar soared to the upside after the government reported better than expected retail sales in November. The increase was more than twice pre-report estimates. The Greenback received an additional boost after the University of Michigan reported a greater than expected uptick in consumer confidence.

Market participants want to see stability in the labor market and an increase in consumer spending. The bullish response to the retail and consumer confidence numbers is as sign that speculators believe the Fed has enough evidence to hike interest rates sooner than expected.

The March Euro collapsed to the downside under heavy selling pressure. The downside momentum took this market under the November bottom at 1.4625.

The March British Pound is trading weaker but still holding the low for the week at 1.6166 as well as a .618 retracement level at 1.6154.

The reversal of carry trade positions helped drive the March Japanese Yen sharply lower. This morning’s reaction to the bullish U.S. economic reports triggered a burst to the upside which has this market in a position to test uptrending Gann angle support at 1.1053.

The March Swiss Franc turned the weekly main trend down on the trade through .9690. The sharp break this morning negated yesterday’s potentially bullish closing price reversal bottom.

Signs of a recovery in the U.S. economy, a mixed stock market and sharply lower gold are all factors contributing to the weakness in the March Canadian Dollar. Yesterday it was reported that Canada’s trade balance posted a surplus because of higher precious metal prices so weaker gold will turn this market bearish.

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