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Weaker Dollar Fails to Ignite Strong Equity Rally

James Hyerczyk from ForexHound.com at 12/01/09


The weaker U.S. Dollar failed to ignite the strong rally in the equity markets that many investors had been counting on.  Last week the equity markets sold off on news that Dubai World was having problems meeting its debt obligations.  On Friday, however, the stock markets posted a strong recovery as bargain-hunters snapped up cheap stocks on the news that the Dubai situation was overblown.  Today, many investors expected a follow-through rally after Dubai World creditors said that the situation was under control.  In addition, many stock traders believe that that the issue was a more local than global problem. 


Throughout the day, the stock indices failed to attract strong buying despite the weaker Dollar and mild demand for higher yielding assets. This could be a sign that investors are content with this year’s gains and fearful of adding additional risk to this year’s portfolio.


Watch for increased volatility the next few day as technical factors indicate this market is ripe for some big moves. If a secondary lower top has been formed in the indices, then look for a sharp break to the downside.  


December Treasury Bonds and Treasury Notes turned around after trading lower early in the trading session. Weaker equity markets caused investors to take a look at safety at this time rather than return.  The direction of the stock market should dictate the movement in the fixed income market.


The U.S. Dollar tried to mount a comeback at the mid-session but failed to sustain upside momentum and finished the day down but off the low.  The Dollar was down most of the day and traders renewed interest in riskier assets on optimism that the Dubai World credit issue would resolve itself. Investors seemed tentative to pound the Dollar lower which could be an indication that problems are not over. Breaking last week’s Dollar Index low at 74.27 will be an indication that global investors consider this matter to be a local issue rather than a possible international calamity.


Today’s better than expected Institute for Supply Management-Chicago business index also helped hold the Dollar in check.


A rise in consumer prices helped boost the December Euro overnight but the inability to take out the recent high for the year at 1.5144 is helping to generate new selling pressure.  The main trend will turn down when 1.4801 is penetrated.  The return of an appetite for risk driven market will help the Euro maintain its upside momentum.


The December British Pound was the first currency pair to turn lower this morning after the British Pound failed to hold onto earlier gains. Pressure came from a report showing that U.K. consumer confidence unexpectedly weakened and a general feeling that the U.K. economy will continue to weaken over the short-term despite massive amounts of stimulus being pumped into the financial system. More selling pressure could hit this market if last week’s bottom at 1.6292 violated.   Watch for a hard acceleration down if the pair of main bottoms at 1.6261 and 1.6250 fail to hold.


February Gold see-sawed throughout the day as the Dollar has moved both higher and lower. The lack of interest in the upside could be a sign that investors are considering this market overbought at current levels.  This could trigger the start of a substantial profit-taking correction especially if the Dollar begins to mount a strong comeback.  March Silver turned the main trend down last week.  This divergence from gold could be another sign that traders are taking price protection against a big sell-off.


March Crude Oil held onto its gains but lower equity markets and a flat Dollar helped to limit its upside movement.  The weak economy should continue to keep pressure on demand.  The crude oil charts also suggest that the way of least resistance is down because of the lower-top, lower-bottom formation. 

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