Weaker Global Equity Markets Drive U.S. Dollar Higher

James Hyerczyk from ForexHound.com at 11/20/09

Lower global equity markets are helping to push the U.S. Dollar higher as investors shun risky assets for a second consecutive day.  Traders began getting nervous earlier in the week after Fed Chairman Bernanke mentioned the level of the Dollar in a speech.  This was followed by supportive comments from European Central Bank President Trichet who used a speaking opportunity to announce his agreement with Bernanke and to try to talk up the Dollar.

The recent pace of the decline in the Dollar has been giving traders a clue that sentiment may be shifting.  This shift started at about the same time that China was talking about changing the value of the Yuan.  While China remained hard-nosed about its currency this week when pressed by President Obama to change its ways, speculators were beginning to bet that China would eventually cave into international pressure and make a small adjustment in how it pegs its currency. 

The combination of comments from Bernanke and Trichet along with an easing of China’s currency pricing policy seems to have given traders an excuse to lighten up their short Dollar positions.  Speculators are also starting to talk about a possible short squeeze in the Dollar which could trigger a strong short-covering rally.