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USD Graphic Rewind: Beleagured Buck Set for Further Declines
Written by article default Thursday, 03 March 2011 11:20
The dollar index gave up early gains and closed sharply lower, posting fresh 2011 lows and now looking all but set to test 2010 lows at 75.60. The turnaround point came as the Euro-zone PPI came in significantly higher than expected showing that inflationary pressure is growing in the euro-region. This gave speculators that the ECB will toughen its language today after its rate decision (at 12:45GMT) to pave the way to interest rate hikes in the near-term in an effort to tamp down inflationary pressures before they can get a foothold in the recovering economy. Speculation of this nature has kept the euro bid in recent days and even weeks and finally yesterday helped lift Eur/Usd above the key 1.3860 level which opens a more meaningful topside extension. As such, the buck is under immense pressure as rate hike speculation drives the euro (and the pound for that matter) higher.
With former 2011 lows by 77.00 now well broken and a double-bottom averted the index looks all but set to continue its decline to 2010 lows around 75.60. As long as the Fed maintains its ultra-accommodative stance and continues to suggest that inflation in the US economy will only be a fleeting and moderate event the buck is unlikely to catch much of a bid. As the ECB and BoE ramp up their anti-inflation rhetoric and continue to imply they will tackle inflation with rate hikes the buck will always lose out to these two currencies. Another cause for concern comes from the fact that during the on-going turmoil in the Middle East and North Africa the buck has hardly caught a safe haven bid, safe haven flows have been into the yen, franc and gold while the dollar has apparently lost its safe haven status. The question then beckons, with the Fed committed to an accommodative policy and safe haven bids heading elsewhere; when will the buck experience a period of relative strength?