U.S. Dollar Falls to 15 Month Low against Basket of Major Currencies

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

The U.S. Dollar fell to a 15 month low against a basket of currencies on Tuesday as concerns about debt issues in Dubai subsided, leading to increased demand for higher yielding currencies. Further weakness in the Dollar was attributed to a report that Chinese manufacturing increased at its fastest pace in five years. 

The weakness in the Dollar helped boost commodity and stock demand as investors once again felt comfortable adding more risk to their portfolios. 

U.S. equity markets opened higher and maintained strength throughout the day.  The leader was the December E-mini Dow which took out the November high and rallied to 10494 before settling below the high. 

Once again the December E-mini S&P 500 backed away from its most recent top at 1112.25.  Traders have gotten used to buying dips and seem to be reluctant adding to positions at higher levels.  The current chart pattern suggests that this market could break out over the resistance and rally to a major 50% price level at 1122.00.

The December E-mini NASDAQ was repelled by 1800.00, but still managed a strong gain for the day.  In order for all three indices to get back in sync, the NASDAQ needs to take out the November high at 1813.75.  If the Dollar maintains its downward slide, it shouldn’t be hard for the stock indices to reach new highs for the year.

The rise in higher yielding assets pressured the Treasury markets throughout the day with the March Treasury Bonds taking the hardest hit. Yields for both March Treasury Bonds and March Treasury Notes rose as these two instruments are begin forced to compete with the higher yields investors are getting in the equity markets.  The chart indicates that March Bonds should break to at least 121’06 over the short-run with 120’24 a possible target by December 7th.

Support for the U.S. Dollar continued to erode all day triggering a collapse in the Dollar Index to near last week’s low at 74.27.  A break through this level sets up a further decline to 73.67 which would match the April 2008 bottom.

News that Chinese manufacturing rose to a seasonally adjusted level of 55.7 helped drive the December Euro over $1.51.  Later this week, traders expect the European Central Bank to leave interest rates unchanged, but offer plans to gradually decrease its financial stimulus package.

The December British Pound rose sharply as U.K. manufacturing increased slightly. Technically, this market rallied back into a retracement zone at 1.6574 to 1.6646.  This market may use this current retracement as an opportunity to form a secondary lower top.  Yesterday’s drop in consumer confidence and rising unemployment are still major concerns for the bulls.

The Dollar traded higher versus the Yen on Tuesday after the Bank of Japan took action to weaken its currency.  The BoJ voted earlier this morning to leave interest rates unchanged while deciding to provide three-month loans to commercial banks at an interest rate of 0.10 percent.  This action by the BoJ is expected to help stimulate growth and prevent deflation. 

News that Russian will add the Canadian Dollar to its Forex reserves, along with higher equity and commodity markets, helped to pressure the U.S. Dollar against the Canadian. Demand for higher yielding assets should continue to strengthen in the Canadian Dollar.  The chart pattern suggests more upside action to follow now that the .618 retracement level at .9574, and a pair of old tops at .9570 and .9599 has been broken.  The only thing that could stop the rise in the Canadian Dollar will be action by the Bank of Canada to provide liquidity to the market.  The BoC is concerned that a rising currency will hurt export demand.

February Gold broke through the $1200 barrier for the first time but closed below it as profit-takers lightened up on their positions.  The strong rallies in overnight trading are signs that foreigners are driving this market higher. The weaker Dollar provided all of the support at throughout the trading session.  Look for higher markets to continue unless the Dollar reverses course.

March Crude Oil traded higher throughout the day buoyed by stronger stocks and a weaker Dollar. News that Chinese manufacturing was up is expected to increase demand for crude oil. The trend remains down until the last main top at 82.30 is violated, but regaining a key retracement price at 80.27 has put a bullish tone in this market.  A break back under 79.24 will be a sign of weakness.