USD Rally To Gather Pace On Rate Expectations, Euro Selloff In Sight

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10018.28

10026.87

9964.75

0.21

95.55%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 0.21 percent higherfrom the open after moving 96 percent of its average true range,and we may see the reserve currency appreciate further during theNorth American trade as the shift away from risk-taking behaviorgathers pace. However, as the 30-minute relative strength indexfalls back from a high of 69, the pullback in the oscillator mayultimately lead to a short-term correction, and we may see thedollar consolidate over the remainder of the week as marketparticipants weigh the prospects for future policy. Nevertheless,the shift in the policy outlook reinforces our bullish forecast forthe USD, and the reserve currency should appreciate furtherthroughout the year as the Fed looks to normalize monetarypolicy.

Indeed, Minneapolis Fed President Narayana Kocherlakota curbed speculation for another round of quantitative easing, arguing that the FOMC should look to drop the zero interest rate policy (ZIRP) later this year, and we should see the committee continue to soften its dovish tone for monetary policy as central bank officials take note of the more robust recovery. At the same time, Fed Chairman Ben Bernanke talked down the risks surrounding the world’s largest economy, stating that U.S. banks could withstand potential shocks coming out of Europe, and the central bank head may continue to strike an improved outlook for the region as the recovery gets on a more sustainable path. As relative strength index maintains the upward trend from earlier this year, we are still looking for another run at the 78.6 percent Fibonacci retracement around 10,118, and the shift in central bank rhetoric should continue to prop up the dollar as interest rate expectations pick up.

All four components continued to weaken against the USD, led by a 0.40 percent decline in the Australian dollar, while the Euro shed 0.25 despite the positive headlines coming out of the region. Indeed, Fed Chairman Bernanke said European policy makers ‘need to step up and do a lot more’ in addressing the sovereign debt crisis, and the global community may continue to push the EU to take a more proactive approach in curbing the risk for contagion as the fundamental outlook for the euro-area remains bleak. Moreover, Mr. Bernanke warned that ‘further strengthening of the European banking system’ will be required as the region continues to face a risk for a prolonged recession, and we may see the European Central Bank continue to carry out its easing cycle this year in an effort to shore up the ailing economy. As the head-and-shoulders top in the EURUSD takes shape, we are looking for a major selloff in the exchange rate, and the pair should come up against the 23.6 percent Fib from the 2009 high to the 2010 low around 1.2630-50 to test for support.

--- 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/2012/03/21/USD_Rally_To_Gather_Pace_On_Rate_Expectations_Euro_Selloff_In_Sight.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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