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Gold Surges as Dollar is Unable to Follow−Through to Upside

James Hyerczyk from ForexHound.com at 11/23/09


Last week the December Dollar Index posted a weekly reversal bottom, but the overnight action failed to confirm this bottom with a follow-through rally.  This sets up a break of at least 50% of last week’s range or even a new 15-month low. 


The weaker Dollar has triggered another round of buying in December Gold.  Last night gold reached another new all-time high.  The fundamentals remain intact for this rally to continue.  Technically, conditions are overbought but traders will be waiting to buy after any sizeable correction.  The weekly chart indicates that chances are fairly remote that the trend will turn to down anytime soon.


Equity futures are up big overnight as traders realize that trading the long side in the stock market is the best game in town as long as pressure remains on the Dollar.  Last night’s rally has already retraced more than 50% of the recent drop in the market.  Regaining 1100.00 is bullish for the December E-mini S&P 500.  The next upside target for this contract is the major 50% price at 1122.00.  Last week’s closing price reversal top was not confirmed which means that 1083.00 will most likely become a new higher bottom.


December Treasury Bonds and Notes are trading slightly lower.  Money from the sale of fixed income instruments is moving back into the equity markets. Losses are being limited by the thought of more future buys of mortgage backed instruments by the Fed.


Supply/demand concerns are being ignored by crude oil traders as stronger equity markets and a weaker Dollar are providing solid support.  Grumblings out of Iran are also providing support.  


The December Euro is trading sharply higher overnight as speculators increase bets the U.S. economy will continue to weaken.  Traders are basing their expectations in part on U.S.  economic reports this week which are expected to show a slower than expected recovery.


Today, existing home sales may show a slight increase in October, but tomorrow’s revised GDP could be cut below the 3.5% increase presented last month.  Among other concerns for investors are high unemployment and foreclosures.  Recent reports have showed the U.S. economy is losing momentum which indicates a long, bumpy road to recovery.


Overnight, traders are reacting to news that the Fed will keep its stimulus measures intact and interest rates low beyond the announced March 2010 date.  This is triggering the rally in the Euro as speculators believe that the European Central Bank is in a position to begin removing its stimulus from the market. 


Yesterday, Federal Reserve Bank of St. Louis President James Bullard said that he supported extending the Fed’s mortgage buyback program beyond March 2010.  The dovish language recently used by the Fed is helping to drive the Dollar lower and demand for riskier assets higher.  Bullard’s position was based in part on his analysis of unemployment and labor markets.  He said, “unemployment is high, and labor markets are lagging.”  During a holiday shortened, low volume week, this type of comment can go a long way as seen by the punishment the Dollar is taking overnight.


Bullard’s comment along with speculation the ECB may begin to withdraw stimulus measures has put the Euro back on a path toward $1.5000 or perhaps even a test of the high for the year at $1.5063.  Now that some central banks are close to lifting stimulus measures, investors are starting to use more traditional analysis to position themselves in the Forex market.  This means interest rate differential analysis.  At this time with the ECB holding interest rates at 1.0% and the Fed maintaining historically low rates, the best return is in the Euro.  This is another recent why this market should rise. 


Unless the ECB steps in to talk down the Euro or use more aggressive tactics to weaken its currency, a new high for the December Euro is inevitable.

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