Money Moves to U.S. Dollar on Debt Concerns.

The U.S. Dollar continued to strengthen, but not because of the possibility of higher interest rates like last Friday’s rally, but because of debt concerns and credit ratings.

The U.S. Dollar continued to strengthen, but not because of the possibility of higher interest rates like last Friday’s rally, but because of debt concerns and credit ratings.

Investors poured money into the Greenback in a flight-to-quality rally after Moody’s cut the credit ratings on six Dubai state-linked companies. Moody’s based its decision on the assumption that it cannot assume the government will back the debt of these companies.

In addition to Dubai’s credit downgrade, Moody’s also issued a stern warning that it may cut the U.S. and U.K. credit rating to below Aaa. They also added, however, that both of these nations are “resilient” but nonetheless risk an eventual downgrade if positive steps aren’t taken to shore up debt finances.

Finally, Fitch credit rating services lowered Greece’s credit rating because of its huge debt.

This morning the Bank of Canada announced that interest rates would remain at 0.25 percent until June 2010 and that it was still concerned about the strength of the currency and its possible negative affect on exports. This news helped send an already strong USD CAD sharply higher.

The EUR USD is weakened after breaking the last main bottom at 1.4801 earlier in the week. The next downside target is 1.4625. The currency was hit hard after the Dubai and Greek credit downgrades. Greece’s credit reduction is of particular concern because it could have an affect on Euro Zone economic activity. An unexpected drop in German industrial production weighed on this currency before the New York session even started. Concerns are being raised regarding the pace of fourth quarter growth in Germany and the Euro Zone.

Currency traders bought the lower yielding Yen on concerns about holding higher risk assets. This rally occurred despite the approval by the Japanese government of a new $81 billion stimulus package. Traders did not react to this news because it was announced last week and was already priced in.

The British Pound accelerated to the downside today on concerns that credit problems in Dubai would spread to U.K. banks. The threat of a rating cut by Moody’s further weakened this currency throughout the day. Further complicating the possibility of an economic recovery is the threat by the U.K. government to raise taxes and trim spending.

The USD CHF picked up strength all morning as it regained an old main top at 1.0222. Upside momentum could drive this market to 1.0337. Swiss Franc traders are also being influenced by the movement in the gold market. Weakening gold is pressuring the Swiss Franc. Gains in the USD CHF could be limited by a short-covering rally in gold later this afternoon. On December 10th the Swiss National Bank is expected to leave its benchmark interest rate unchanged and offer clarity as to its future monetary policy plans. Most traders expect the SNB to discuss its concerns about deflation and the possibility of another round of intervention if the Swiss Franc appreciates too much against the Euro.

Downside momentum triggered by the lack of demand for lower-yielding assets helped weaken the AUD USD. A break in the stock market will act as a catalyst to drive this market lower.

Expect the Reserve Bank of New Zealand to leave interest rates at 2.5% until at least the Third Quarter 2010 when it makes its monetary policy statement tomorrow. Unemployment and a drop in exports should help to curtail gains in the economy. Look for more downside potential as long as investors remain averse to

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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