Stable U.S. Equity Markets Help Limit Dollar Gains

Overnight the Dollar climbed sharply higher as global investors dumped stocks and commodities on concerns that Dubai World’s debt problems would escalate into a worldwide credit crisis similar to the one the U.S. faced when Lehman Brothers collapsed in 2008.

Overnight the Dollar climbed sharply higher as global investors dumped stocks and commodities on concerns that Dubai World’s debt problems would escalate into a worldwide credit crisis similar to the one the U.S. faced when Lehman Brothers collapsed in 2008. Fear raced through the global investment community, making lower-yielding assets such as the Dollar and the Yen more attractive. The situation in Dubai began to break late Wednesday night and spilled over into Thursday while U.S. markets were closed for the Thanksgiving holiday.

The U.S. Dollar gave back over 50% of its early morning gains as investors took profits after a strong two-day rise. The inability to break equity markets lower after the opening helped drive up demand for higher risk assets. Investors began selling the Dollar after it became clear that there would be no panic selling of higher risk assets.

Investors began to liquidate higher risk assets when the largest corporate entity in Dubai asked creditors for a six-month postponement of $60 billion in debt payments. This action by the Dubai entity raised concerns that other emerging market entities may be overextended in debt which could lead to even more liquidation.

Global financial markets took a huge hit as traders feared that banks were facing major exposure to Dubai World’s mounting debt issues. Once U.S. equity markets opened and were able to hold their lows, profit-takers hit the Dollar and the foreign currency markets posted a strong recovery from their lows.

Investors may trade a little tentatively early next week as they continue to wait and see how the Dubai situation unfolds. Some feel that the situation will be settled locally. Others feel the debt problems are more widespread than initially reported.

The EUR USD traded lower but well off its low at 1.4828. The main range is 1.4625 to 1.5144. Today’s low stopped at the .618 retracement level of this range at 1.4823.

The GBP USD fell sharply this morning after it was reported that U.K. banks had exposure to Dubai debt. This weakness quickly dissipated when the Royal Bank of Scotland downplayed its risk exposure. The British Pound found support at a 50% price level at 1.6293. Additional support came from two main bottoms at 1.6261 and 1.6250.

The USD JPY plunged to a 14-year low this morning at 84.83. Throughout the day, however, this market mounted a strong recovery, as equity markets failed to follow-through to the downside.

The strong recovery in equity and crude oil prices helped to boost the Canadian Dollar off of its low. The main trend in the USD CAD turned up overnight, but the lack of follow-through to the upside indicates it was most likely short-covering rather than new buying.

The AUD USD turned the main trend down after the hard sell-off overnight. The inability to break the U.S. equity markets triggered a huge short-covering rally in the Aussie throughout the New York session. Although this market may continue its rally early next week, trader confidence in buying higher yielding assets may curtail demand.

The NZD USD traded under pressure this morning but a short-covering rally throughout the day helped to cut the losses. Traders are taking a “wait-and-see” approach into the week-end as they assess the situation in Dubai. It is possible that appetite for risk may be diminished for a while as this week’s events may have shaken investor confidence.

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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