Dollar Tumbles against Euro and Commodity-Linked Currencies
The U.S. Dollar hit a six-week low against the Euro driven
by greater demand for risky assets and a hawkish comment from the Reserve Bank
A mid-morning report showing that the U.S. Services Sector slowed last month
also contributed to the Euroâ€™s rally on the prospects of a weaker outlook for
The recent strength in the Euro versus the Dollar is an
indication that investors are adjusting positions and absorbing the shift in
the recent economic data. Todayâ€™s turnaround in many of the Forex markets
demonstrates investor willingness to buy riskier assets.
Recent weak U.S.
economic releases have encouraged traders to move into a market psychology
where poor data triggers Greenback weakness. Earlier in the year, investor
sentiment was the opposite. At that time, weak data triggered flight-to-quality
buying of the Dollar.
Although a reading over 50 still indicates an expanding
economy, todayâ€™s ISM report showing a drop from 55.4 in May to 53.8 could be a
sign that the pace of the expansion is slowing. This news helped drive an
already weak Dollar sharply lower almost immediately after its release. Later
during the trading session, short-term overbought conditions helped the
Greenback regain some of its earlier losses.
Last weekâ€™s upside momentum in the EUR USD continued this
morning. Technically, the main trend is up. The charts indicate that the market
has a clear shot at reaching a major retracement price at 1.2783.
Another sign that investors were shifting sentiment toward
more risky assets was the sharp rise in commodity-linked currencies. Early in
the trading session, the AUD USD reversed an overnight sell-off after the
Australian central bank issued a hawkish policy statement. The intra-day rally
put the Aussie in a position to form a closing price reversal bottom after
forming a support base inside of a retracement zone at .8469 to .8378.
Fundamentally, the market was supported by hawkish comments
from the Reserve Bank of Australia.
In its policy statement, the Australian Central Bank kept its benchmark
interest rate unchanged at 4.5%. It did, however, indicate that further rate
increases are to come even if inflation continues to increase and Chinaâ€™s economy
slows. Todayâ€™s strong rally reflects the fact that speculators had been looking
for more dovish comments from the RBA.
The strong rise in U.S. equities and a firm crude oil
market also triggered a sharp break in the USD CAD. Todayâ€™s chart action
indicates that further weakness is likely now that it appears that investors
have decided to explore the long-side of riskier assets.
Todayâ€™s statement by the RBA also is a strong indication
that the Bank of Canada will hike interest rates at its next meeting on July 20th.
Speculators had been positioning themselves for a neutral stance by the BoC.
Although the RBA left its benchmark rate unchanged, its hawkish comments leaves
open the strong possibility that another rate hike is imminent. Todayâ€™s sharp
turnaround in the Loonie was most likely short Canadian Dollar traders making a
hard, fast adjustment to the possibility of higher interest rates.
economic data and a shift in risk sentiment also pressured the USD JPY.
Although this currency pair appears to be rangebound while forming a support
base, traders can begin to anticipate a rally if U.S. equity markets begin to mount
a short-covering rally. This rally will most likely be fueled by investors
reapplying the carry trade strategy to the Japanese Yen. When this occurs,
investors borrow funds in the lower yielding Yen to invest in riskier assets
such as U.S.
Although there is likely to be profit-taking breaks along
the way, there has been a notable shift in investor mentality toward more risk.
Traders should be aware that weak U.S. economic reports are likely to
drive traders out of the Dollar and into more risky assets. The logic behind
this shift is that central banks will continue to keep the markets liquid. This
means interest rates for the weaker nations will continue to remain low.
Aggressive investors will be looking to find a place to put their money to work
in an effort to earn better yields in exchange for higher risk.
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