Profit-Taking Hits U.S. Dollar

The U.S. Dollar is trading weaker overnight after rallying to a 5-week high.

The U.S. Dollar is trading weaker overnight after rallying to a 5-week high. The current rally from the bottom at 74.27 is stopping short of the November 20th top at 76.50. Technical factors indicate an overbought market which could correct back to 75.26 over the short-term before taking another shot at turning the main trend higher.

Concern over global debt issues triggered by credit rating downgrades in Dubai and Greece should continue to hang over the market. Traders will be watching these two nations for signs that their situations are spreading to other countries.

The EUR USD is mounting a mall recovery after selling off sharply yesterday. The overnight rally is related to technical factors because the fundamental picture is beginning to develop a bearish look. The chart pattern suggests that the next downside target is 1.4625 although a retracement of the current break is not out of the question. The old bottom at 1.4801 is the first likely upside target.

Early this morning the Japanese government released a worse than expected Third Quarter GDP Report. The actual report showed an increase of 0.3% versus the preliminary guess of 1.2%. Nonetheless, traders are reacting to generally weaker global equity markets and risk aversion caused by debt concerns. Overnight the USD JPY reached its first retracement objective at 87.80. Further weakness could send this market to 87.10. Oversold short-term conditions could trigger a short-covering rally back to 88.57.

The GBP USD finally broke through a key 50% price at 1.6287 and the October bottom at 1.6245 overnight, stopping short of a Fib retracement price at 1.6148. Short-term conditions led to buying which now has this currency pair in a position to post a daily closing price reversal bottom. Profit-taking and short-covering is most likely being triggered by position evening ahead of tomorrow’s Bank of England policy meeting. The BoE is expected to leave interest rates unchanged and its asset buyback program untouched. Today the U.K. government is going to release plans to short up its budget. This may include the proposal of special taxes on bank bonus pools. Traders will also be keeping an eye on the debt situation in Dubai because some U.K. bank may face exposure to the bad debt.

Yesterday the Bank of Canada announced that interest rates would remain at 0.25 percent until at least 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. Overnight the Canadian Dollar is trading better as profit-takers are controlling the market. Technically, this currency remains rangebound with trading on both sides of the 50% price at 1.0598 likely.

Overnight the USD CHF made an attempt to test the November top at 1.0337 but failed. The current chart formation suggests a possible closing price reversal top formation at 1.0290. The current loss in the USD CHF could be extended if gold begins to mount a rally or if traders decide to take profits ahead of tomorrow’s central bank meeting.

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.

The AUD USD is mounting a strong recovery after trading lower overnight. Oversold conditions triggered profit-taking which led to the current short-covering rally. Last night it was reported that the Australian economy is beginning to show signs of weakness after three interest rate hikes. Higher borrowing costs contributed to drops in consumer confidence, home loans and investment lending. There is a possibility that this market could rally back to .9167 before selling pressure resumes.

Tomorrow traders will be looking for 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. Unemployment and a drop in exports continue to slowdown the economy. Overnight the NZD USD turned to the upside after initial weakness. The current short-covering rally could trigger a test of .7171 to .7201 before new sellers step in.