Dollar Doldrums
Today's Idea
Given the strength in commodity prices, some traders could continue to shun the US Dollar in favor of higher yielding currencies. The prospect of further increases in liquidity provided by the Fed seems to have scared away any traders that want to be bullish on the US currency. Technically, the Dollar Index chart is in danger of breaking through critical technical levels. There may be some short-covering taking place in upcoming sessions, so some traders may wish to consider entering into a bear put spread below the market price. Some traders may wish to buy the May 74/76 bear put spread at a premium if 0.50. The trade risks the initial cost of $500 for a potential max profit of $1,500.
Fundamentals
The US Dollar Index is trading at its lowest levels since the toxic mortgage debt fallout in the fall of 2008. The US currency has suffered in large part because of the rally in commodity prices stoking inflation fears. Some traders have abandoned ship in favor of higher yielding currencies, most notably the Canadian, New Zealand and Australian Dollars. The loonie has benefited from rising Crude Oil and metal prices. Also, the Euro has rallied versus the greenback due to expectations that the ECB will raise interest rates. The interest rate play has outweighed European sovereign debt concerns for the time being, as the pan-European bank tends to be much more hawkish than the Fed. There has been talk of QE3 here in the US, which is also putting downward pressure on the greenback. Recent home sales numbers have not been up to par with other economic data being released, which has caused increased speculation among investors that the Fed will pump more money into the economy in order to spur home-buying. This seems to be the Fed's answer to all economic problems – simply flood the US with cheap greenbacks.
Technical Notes
Turning to the chart, we see the June Dollar Index trading through the 76.00 support level in recent sessions. The contract has managed to battle back above this level, avoiding a technical breakout to the downside thus far. A violation of 76.00 could bring about a test of 2008 lows in the low 74's. To gain upward momentum, prices would likely have to cross through the 77.50 level.
Rob Kurzatkowski, Senior Commodity Analyst
