USD Poised For Larger Correction, Japanese Yen Strength To Persist

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9464.21

9492.52

9455.03

-0.05

41.30%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 0.05 percent lowerfrom the open after moving 41 percent of its average true range,and the greenback may consolidate throughout the remainder of theday as market participation tends to taper off ahead of theweekend. However, the narrowing Bollinger Bands highlights a riskof seeing a breakout in the USD, and we may see a sharp rebound inthe beginning of the following week as the gauge appears to befinding near-term support around 9,450. As the greenback remainsoversold, the small rebound may turn into a larger correction, andthe reserve currency may work its way towards former support around9,600, which could turn into new resistance.

As the relative strength index sits at 30, we need a rebound in the oscillator to confirm a larger correction in the USD, but the greenback may consolidate ahead of the FOMC interest rate decision on November 2 as market participants weigh the prospects for future policy. As the recent developments coming out of the world’s largest economy encourage an improved outlook for future growth, the committee may soften its dovish tone for monetary policy, and the central bank may bring its easing cycle to an end as Fed officials expect the recovery to gather pace over the coming months. However, the committee may keep the door open to expand its balance sheet further given the ongoing turmoil within the world financial system, and Fed Chairman Ben Bernanke may talk up speculation for additional monetary support as the fundamental outlook for the global economy remains clouded with high uncertainty.

Two of the four components pushed higher on Friday, led by a 0.29 percent rally in the Japanese Yen, but the recent appreciation in the low-yielding currency increases the threat of seeing a currency intervention as it dampens the prospects for an export-led recovery. Indeed, Japan’s Finance Minister, Jun Azumi, pledged to take ‘bold’ action against the local currency as the USD/JPY slipped to a fresh record low of 75.65 earlier this week, but we may see the Bank of Japan continue to sit on the sidelines as it looks for alternative ways to weaken the Yen. As the BoJ expands its asset purchase program by another JPY 5 trillion, it seems as though the central bank will resort to easing monetary policy further rather than directly intervening in the foreign exchange market, but the Yen may continue to appreciate against its major counterparts as market participants diversify away from the greenback.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2011/10/28/USD_Poised_For_Larger_Correction_Japanese_Yen_Strength_To_Persist.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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