Dollar Freefall Continues
Funndamentals
The greenback continues to get battered by traders concerned that the Fed may be injecting too much liquidity into the economy. Many traders also point to more reassuring economic data and strong equity markets as reasons to be short the US Dollar. Commodity prices continue to rise, as demand for Dollar hedges increases. The surge in Gold prices is a prime example of a market that seems to be overbought, yet prices continue to rise due to a seemingly endless flow of new investment. Currencies for developed nations have taken a back seat to growth and commodity based economies, which also happen to have higher yields. When the Fed meets at the beginning of next month, it is possible that the bank may soften its language and move away from the term “quantitative easing,” as the phrase has negative connotations with many traders. Wording aside, the central bank is likely to continue its policy of aggressively buying treasuries and other assets. The question many traders have to ask themselves is when the USD will finally find a bottom. The currency is not likely to find a friend in the form of the US government, as spending continues to balloon out of control. Instead, Dollar bulls could benefit from deteriorating economic conditions, where commodity demand would suffer and traders would use the greenback as a defensive play. So far, economic indicators have improved, which makes this scenario a low probability. A weak Dollar is a major concern for emerging markets, as a strengthening of local currencies could make demand for exports suffer. Several nations have taken steps to limit outside investment to halt the sharp rise in their local currency. Whether this will ultimately have an effect on exchange rates remains to be seen.
Trading Ideas
The Dollar Index seems to have no supporting forces aiding the market out there. The seemingly endless supply of liquidity provided by the Fed has aided the economy at a high cost -- most notably a devaluation of the US currency. The chart does not show the DXZ10 finding any traction. It is difficult to fight the trend and predict if and when the market may bounce. For this reason, some traders may wish to consider buying a put option with limited risk – for example, purchasing a Dec Dollar Index 75 put for 0.45, or $450, with an objective of 1.00, or $1,000.
Technicals
Turning to the chart, we see prices dropping almost vertically and falling below support near the 77.50. The next significant area of support comes in at 75.00, which can be seen as critical. A violation of 75.00 suggests that prices will once again test all-time lows. The RSI indicator is showing that prices are technically oversold, which could offer the market some near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
