Dollar Rallies Still Unconvincing as S&P 500 Jumps, US Rates Continue Slide

John Kicklighter, DailyFX

NEW YORK (DailyFX) -- Through the economic docket filled out this past trading day for the US dollar, the influence of the collective event risk was still too light to jumpstart a genuine trend. Market activity for the dollar, currencies and broader financial markets is still too thin to instigate lasting runs. This is a reality that some traders are acclimating to and subsequently lowering their requirements for calling a significant move for the greenback. When it happens, an authentic trend for the benchmark currency will develop alongside meaningful drives in other asset classes; and it will certainly be backed by a tangible fundamental catalyst (even if that spark happens to be a pure shift in collective sentiment). Therefore, we should view the dollar's second consecutive advance through Thursday's close with caution. The Dow Jones FXCM Dollar Index advanced 0.2 percent from the previous session's close - clearing this week's range high at approximately 9,510. Looking at the currency's performance against specific counterparts, we note that the greenback lost ground against commodity bloc (the Canadian, New Zealand dollars) but advanced against fellow safe havens (Swiss franc, Japanese yen), the Euro and pound.

Typically, when the dollar is higher through the trading day, it is based on a general slide in risk appetite. However, this time around, the first advance from the S&P 500 in seven trading days (following the longest series of consecutive losses in many months) would help the export / high-yield currencies; while the more appropriate safe haven (Swissie) and funding currency (yen) gave up ground to the dollar. As for the principle European currencies, event risk would turn the tables. We note this mix in performance; because if it continues, the greenback's advance will quickly stall. The greatest potential for a bullish run remains a slump in risk appetite or a recovery in US rates. Yet, in addition to the jump in equities carrying over to the Asian session; we note short-term US Libor rates were unchanged and the US 2-year Treasury yield has yet to break its steady, two-month tumble.

For Friday's session, we will keep an eye on the underlying 'themes'; but the probability of a major shift through the closing 12 hours of the week is much lower than it was in the preceding sessions. The economic docket brings both the monthly budget report for May (important given the warnings of a possible credit watch change on US sovereign debt recently) and imported inflation levels for the same month. Neither is more influential than the April trade balance (a smaller-than-expected $43.7 billion deficit). The risk of a major trend developing today is low.