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European Relief Tests Dollar

Posted by Futures on June 17, 2010 9:09 AM

Fundamentals

The Dollar Index has been in a steady decline, after making contract highs earlier this month. The European bailout of Greece, along with attempts to be more proactive to avert a similar crisis in Spain, has restored some investor confidence. This has led to an increased appetite for risk, which has hurt the greenback as a defensive play. There is also a mindset among traders that the Euro may have fallen too sharply against the Dollar in the near-term. Now that the Dollar has fallen back, traders have a moment to step back and reassess the global economic climate. Some of the enthusiasm that helped propel the stock market has begun to wane, as has the extreme pessimism that rocked the markets late last month. The Bank of Spain is conducting stress tests on the nations' banks. If the results are positive, it could be a shot in the arm for the Euro, and could result in further pressure on the Dollar. Conversely, the market's sudden appetite for risk could disappear very quickly if the findings show the government will require international aid.

Trading Ideas

The Dollar Index has shown chinks in its armor in recent sessions. The greenback was strong by default due to the market duress in Europe, rather than strong US fundamentals. At the same time, Europe is far from being out of the woods, so the greenback still has upside potential. For this reason, some traders may wish to take a more conservative approach and enter into a bear put spread, buying the July Dollar Index 86 puts and selling the July 85 puts for a debit of 0.45. The trade risks the initial cost of $450 for a potential profit of $550 if the September futures contract closes below 85.00 at expiration.

Technicals

The September Dollar Index chart shows prices approaching support near the 86.00 level, after failing to cross the 89.00 mark. Yesterday also marked three consecutive closes below the 20-day moving average, indicating that a near-term high may be in place. The RSI indicator has fallen from overbought levels and is quickly approaching oversold levels, which could provide some support to prices.

Robert Kurzatkowski, Trading Specialist