Dollar Woes as Economy Slows
Tuesday, August 23, 2011
The Dollar finds itself in a vulnerable position due to the high likelihood that the Fed will intervene at any inkling that the economy is heading toward a double-dip recession, leading to further expansion of the monetary base. A full-on banking crisis in Europe could stave off declines in the greenback, but all is quiet after the Sarkozy-Merkel meeting last week. Technically, the Dollar Index may be on the verge of confirming a downside breakout from its recent trading range. Longer-term, this would also be a continuation of a downtrend. Some traders may wish to consider entering into a bear put spread, buying the November Dollar Index 74.00 put and selling the November 71.00 put, for a debit of 0.70, or $700. The spread risks the initial cost and has a maximum profit of $2,300 if the underlying December futures close below 71.00 at expiration.
Fundamentals
The US Dollar Index continues to trade near the lower end of its nearly four-month-old trading range. The US currency has not made a meaningful move versus the basket of major currencies, as traders have had to deal with the Eurozone debt situation and the possible European banking crisis. After the S&P downgrade, the Dollar has been trading in the lower end of the range. The Fed may be pressured into further economic stimulus if the equity markets continue to perform poorly and the economy shows further signs of weakening. This may be a dangerous game for the Fed to play, as further stimulus could weaken the greenback considerably, stoking inflation. The fundamental outlook for the Dollar could improve if the Eurozone is mired in a banking crisis. However, if the EU avoids such a crisis, the greenback could see its exchange rate slip.
Technical Notes
Turning to the September Dollar Index chart, we see prices have been trading in a range between 73.50 and 77.00 since May. Lately, prices have been trading in the lower end of this range, and this tightening could suggest that a breakout is imminent in the near future. Longer-term, this trading range can be seen as a wedge formation, which suggests a downward bias to a potential breakout.
Rob Kurzatkowski, Senior Commodity Analyst
