Fed Sends US Dollar Index Plummeting- Further Risks Ahead

By Michael Boutros, Currency Strategist

The greenback ismarkedly weaker at the close of North American trade with the DowJones FXCM Dollar Index ( Ticker: USDOLLAR ) off by 0.55% on thesession. The dollar reversed course mid-day on the heels of theFOMC rate decision where the central bank vowed to keep interestrates at record lows through 2014 as unemployment remainsstubbornly high and a “depressed” housing sectorcontinues to threaten the recovery. The move represents asignificant shift in the central bank’s outlook with thepolicy statement citing that, “Strains in global financialmarkets continue to pose significant downside risk to the economicoutlook.” The Fed officially set an inflation target of 2%while noting that, “inflation will run at levels at or belowthose consistent with the Committee’s dual mandate,”over the coming quarters. Equity markets pared early losses withrisk currencies advancing at the expense of the greenback. By theclose of trade in New York all three major indices were in theblack with the Dow, the S&P and the NASDAQ advancing 0.66%,0.87%, and 1.14% respectively.

The dollar broke belowkey support at the convergence of the 100DMA and the 50% Fibonacciextension taken from the August 1 st and October 27 th troughs at 9850 on theback of the FOMC announcement. As noted yesterday , the dollar now riskssubstantial losses with immediate support targets eyed at 9800. Thedaily relative strength index continues to head lower afterbreaking below RSI support dating back to the October 28 th lows, with theindicator now eyeing trendline support dating back to the May2 nd low around the36-mark.

The index briefly brokeabove trendline resistance of the descending channel formationdating back to the January 15 th highs before quicklyparing gains to close back within the confines of the formation forthe second consecutive day. Interim support for the dollar nowrests at 9800 backed by the 38.2% Fibonacci extension at 9756, and9720. Topside interim resistance holds at the 50% extension at 9850with subsequent ceilings eyed at 9920, the 61.8% extension at 9950,and 9980. Despite today’s developments we remain cautious onthe dollar here as European concerns start to come back into focuswith the dollar likely to pair some of the steep losses seen overthe past few hours. Still, it’s likely we may continue totrend lower into the close of the month with a break below 9800eyeing subsequent support targets.

The greenback declinedagainst three of the four component currencies highlighted by a1.27% decline against the Australian dollar. The high yielderstarted its advance in overnight trade after core inflation datacame in higher than expected- possibly limiting the RBA’sscope to cut interest rates. The second leg up came on the back ofthe FOMC announcement as high beta assets advanced across theboard. For complete levels on the Australian dollar refer to thisweek’s Scalp Report . The euro andthe pound also posted modestadvances of 0.61% and 0.29% respectively. The yen was the weakestperformer of the lot with a decline of 0.05% against a weakerdollar. Again we note that despite dollar weakness, yen advancesare likely to remain tempered as intervention concerns continue tomount.

On the data front, theUS docket tomorrow is highlighted by December durable goods , new home sales,initial jobless claims and leading indicators. Consensus estimatescall for the headline durable goods orders to print at 2.0%, downfrom a previous read of 3.8% with new home sales expected toimprove slightly by 1.9% m/m, up from 1.6% m/m. Initial joblessclaims are expected to rising by 370K, up from a previous print of352K. Look for broader market sentiment to dictate dollar priceaction as Asia Pacific markets come online with the greenbackremaining at risk at these levels.

Upcoming Events

Date

GMT

Importance

Release

Expected

Prior

1/26

13:30

HIGH

Durable Goods Orders (DEC)

2.0%

3.8%

1/26

13:30

MEDIUM

Durables ex Transportation (DEC)

0.9%

0.3%

1/26

13:30

MEDIUM

Non-Defense Capital Goods Orders ex Aircrafts (DEC)

0.8%

-1.2%

1/26

13:30

LOW

Non-Defense Capital Goods Shipments ex Aircrafts (DEC)

1.0%

-1.0%

1/26

13:30

LOW

Chicago Fed National Activity Index (DEC)

-0.1

-0.37

1/26

13:30

LOW

Initial Jobless Claims (JAN 21)

370K

352K

1/26

13:30

LOW

Continuing Claims (JAN 14)

3500K

-

1/26

15:00

MEDIUM

New Home Sales (MoM) (DEC)

1.9%

1.6%

1/26

15:00

MEDIUM

New Home Sales (DEC)

320K

315K

1/26

15:00

MEDIUM

Leading Indicators (DEC)

0.7%

0.5%

--- Writtenby Michael Boutros, Currency Strategist withDailyFX.com

Tocontact Michael email mboutros@dailyfx.com or followhim on Twitter @MBForex .

To be addedto Michael’s email distribution list, send an email withsubject line “Distribution List” to mboutros@dailyfx.com
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/usd_trading_today/2012/01/25/Fed_Sends_US_Dollar_Index_Plummeting-_Further_Risks_Ahead.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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