No Holiday Cheer for the Dollar

A maelstrom of factors Wednesday contributed to burgeoning bearish sentiment for the dollar. Weighing on the dollar are expectations that the U.S. economy is weakening more sharply than originally thought and inflation is whipped, which gives the Federal Reserve more leeway to cut interest rates. On Tuesday, the White House revised down its forecast for economic growth, while Wednesday's reports showed weakness in the labor market, limiting the threat of wage inflation, and dampening consumer sentiment.

Across a variety of borders, hawkish talk out of the eurozone, strong consumer spending in France, and traders' chatter about foreign central banks diversifying their currency reserves has buoyed the euro. Strong Canadian inflation data combined with still-high metals and commodities prices boosts the Canadian and Australian dollars, and traders still believe the Bank of Japan will hike rates soon, if not this year, which strengthens the yen.

"The market is reading news for the dollar as negative, and the pre-holiday thinness of the market is exacerbating the price action," says Marc Chandler, senior currency strategist at Brown Brothers Harriman and a contributor to RealMoney.com.

Chandler believes the euro will not break through the $1.30 level, nor will the dollar break below 116 yen. One reason the euro is unlikely to surpass the $1.30 barrier near term is the danger in following the herd into the Thanksgiving holiday, Chandler says. U.S. and Japanese markets are shuttered Thursday, leaving a perfect opening for European finance officials to talk down the euro, leaving many traders hanging out to dry come Friday morning, he says.