The Dollar Index dove Monday to end a trend of five consistent daily advances through last week – the best trend for the currency since a similar-length run through August 24th. However, this correction should not come as too considerable a shock. For those that merely watch price action for guidance, the greenback may have advanced for five consecutive days; but there was absolutely no conviction in this climb. The fundamentally-inclined found more than enough reason to prepare themselves for a dollar stumble. The most immediate grounds for a correction come through the seasonality effect. Year-end for many is considered a period of thinned speculative liquidity when many traders expect various holidays to sideline a significant portion of capital; while others are encouraged to hold back from major trends before the end of their fiscal tax year. This helps explain the general congestion; but perhaps not intraday volatility. EURUSD may have stalled at a range resistance established at 1.34; but it took a more than 200-point move to push the market that high. Risk appetite isn’t likely responsible for this development considering the S&P 500 was virtually unchanged (though at a two-year high); and the Dow has yet to overtake November’s high at 11,470. So what lead the world’s reserve current to such an aggressive and consistent move?
While a taste for risk may not have acted as the kindling for an explosive move; it certainly helped curb the dollar’s latent strength from the previous week. Over the weekend, the market was bracing for a potential storm in reaction to the Chinese data that was scheduled for release. The release of a vital round of data (CPI, retail sales, industrial production, fixed investment) reinforced expectations that policy officials would act to curb ballooning inflation and asset prices. However, the rate hike many were preparing for never came to pass. Last Friday’s 50 basis point reserve ratio hike seemed to be deemed sufficient. Holding back from throwing the breaks on one of the best performing economies and highest return markets is clearly a boon for speculative interests around the world. That said, the likelihood of an interest rate hike over the next few weeks is still exceptionally high. This will almost certainly weigh on traders’ minds going forward. Later in the day, Europe financial concerns would do little to further the sense of risk appetite as data showed ECB government bond purchases surged and the BIS reported a sharp reduction in US, German and UK holdings of periphery European Union members’ debt. Nonetheless, we would see the dollar really start to fall apart on this shift.
If it wasn’t euro-strength or risk aversion that was driving the dollar lower; the most logical explanation was domestic concerns. There were various reports Monday; but the most remarkable was the Moody’s warning that the proposed US tax package’s influence over debt would wipe out the positive implications of economic growth and increased the threat of a negative outlook for the top rating within the next two years. This shouldn’t surprise; but in effect, it is often ignored until a policy group threatens the status quo. Going with this theme, the Fed is scheduled to convene on policy tomorrow. It is unlikely that they will alter stimulus only a month after the second round of easing was instituted; but a sense for further support and timing could further weigh the feeling of bloated debts and unreliable financials going forward.
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