Weaker Dollar Continues to Drive Risky Assets Higher

The U.S. Dollar closed lower against most major currencies this afternoon as investor demand for higher yields drove up risky assets.

The U.S. Dollar closed lower against most major currencies this afternoon as investor demand for higher yields drove up risky assets. The strong rally continued in the equity markets boosted by yesterday’s favorable comments from Fed Chairman Bernanke and today’s positive words from investor Warren Buffett. Gold also surged to the upside on the prospect of a long-term weaker Dollar.

Despite economic reports showing that the U.S. economy is recovering at a faster pace than the Euro Zone, investors continued to drive the EUR USD higher for the year. Traders have become comfortable with the thought that in spite of the improving economy, the Fed is likely to keep interest rates at historically low levels for some time to come. With the U.S. posting the world’s lowest interest rates, continue to look for strength in the Euro.

Technically, the market reached a new high for the year while breaking out over a major retracement level at 1.4623. Taking out the December 2008 top at 1.4719 was also a sign of strength. The new upside target is 1.4866. The swing chart indicates that the trend is up as long as support holds at 1.4045.

Today’s weakness in the GBP USD reflected the floundering economy. Earlier in the week it was concerns over a squeeze in the U.K. mortgage rates having a negative effect on the real estate market. Today it was a poor unemployment report encouraging the sellers. Losses were most likely limited by the demand for higher risk assets. Technically, this market is struggling at a retracement zone at 1.6577 to 1.6687. Fundamentally, this market is likely to remain weak until the U.K. economy begins to show consistent improvement and the Bank of England relaxes its asset-buyback program.

The USD JPY finished lower but heavy selling pressure seems to be subsiding as traders appear to be defending the .9000 level. Oversold conditions could also be providing support by attracting buyers. The Bank of Japan is also a threat to the strength in the Yen. It has in the past used verbal intervention to push down a rapidly rising Yen. This action usually takes place when it feels the price level in the Yen will begin to have a negative impact on the Japanese economy. There is always a fear that exports will suffer if the Yen gets too high.

The U.S. Dollar continued to get pounded by the Swiss Franc after breaking out of its 90-day range to the downside. Low interest rates in the U.S. are encouraging Swiss investors to bring their money back home. The strong rise in gold has also been putting pressure on the USD CHF.

Strong rallies in equity and energy markets have helped trigger a resumption of the downtrend in the USD CAD. Today’s downside action took out the last swing bottom at 1.0673, indicating further weakness. The building downside momentum has set up this market for a test of the low for the year at 1.0631. The trend will not change to up unless the last main top at 1.0925 is violated.

The Australian Dollar made a new high for the year, boosted by the strong demand for higher yielding assets. The surge in U.S. equity markets and the low interest rates in the U.S. helped attract strong buying power. Aussie traders seemed to have forgotten about the economy and instead have returned their focus to getting the best return on their investment. Major support has moved up to .8156. The trend will change to down if this price level is violated.

Demand for higher yields also gave the NZD USD a boost on Wednesday. Based on the main range of .8215 to .4892, today’s action solidified the strong uptrend by holding above major retracement levels at .6791 and .6946. The charts indicate that barring a complete reversal down in global equity markets, there is plenty of room to the upside.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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