Dollar Soars as Euro Plunges on Greece Downgrade

The U.S. Dollar is surging against a basket of trade weighted currencies overnight following the news that the S&P Corp. downgraded Greece’s credit rating for the second time this year.

The U.S. Dollar is surging against a basket of trade weighted currencies overnight following the news that the S&P Corp. downgraded Greece’s credit rating for the second time this year. This news has been particularly bearish for the Euro as it raises the possibility that more downgrades of Euro Zone sovereign debt are to follow. Investors now fear that the spread of bad debt throughout the region could trigger serious problems banking issues, curtailing the current economic recovery.

The downgrade news came on the heels of yesterday’s Federal Reserve report. While not actually a bullish report for the Dollar, the Fed’s carefully chosen language did nothing to damage the developing uptrend. The Fed essentially declared the financial markets healthy enough to begin removing emergency stimulus before its scheduled ending date on Feb. 1. The Fed cited “improvements in the functioning of financial markets” as the main reason to believe it would let its financial aid packages expire on time in February.

The Fed also added that labor issues were “abating”. This comment was influenced by the drop in the unemployment rate from 10.2% to 10.0%. The Fed upgraded the growth outlook as improvements in economic data since its last meeting in November warranted the following comment, “economic activity has continued to pick-up and that the deterioration in the labor market is abating.” Finally, the Fed added that “financial market conditions have become more supportive of economic growth.”

On the downside, the Fed said, the economy is “likely to remain weak for some time.” In addition, the Fed reiterated its pledge to keep interest rates “exceptionally low” for an “extended period.” This comment led economists to believe that interest rates are not likely to rise until June 2010 or later.

So while the Fed’s comments did nothing to break the Dollar, there were sufficient enough friendly comments to help the Dollar remain firm. Based on this assessment, traders will focus today on the developing debt issues in Greece while speculating that more issues with other countries are likely to surface.

Initially, the thought was that more hawkish comments from the Fed were already priced into the market, but this wasn’t the case during the early hours of today’s session. Almost immediately after the close of the New York trading session, the Dollar began to firm. The Greek downgrade news reaffirmed the trend and fueled a substantial upside breakout.

In addition to the weakness in the European currencies, the GBP USD is under pressure because of a disappointing retail sales report. This news overwhelmed Wednesday’s better than expected jobless claims data.

Lower stock prices and the possibility of higher interest rates in the U.S. are pressuring both the AUD USD and NZD USD. The Aussie is the weaker of the two. Yesterday’s report showing slower than expected 3rd Quarter growth triggered selling pressure as it sent a sign to traders that the Reserve Bank of Australia was likely to take a pause from hiking interest rates over the near-term.

Falling gold prices and the weakening stock market are pressuring the Canadian Dollar. Technically, the USD CAD broke out to the upside on a move through 1.0691. The next upside target is a swing top at 1.0748. The weekly trend will turn to up on a trade through 1.0991.

Demand for higher yields, an improving economy and the reversal of the carry trade is helping to trigger a strong rally in the USD JPY. Overnight this market tested a downtrending Gann angle which stopped the market last week. This angle is at 90.01. A close above this angle on the daily chart signals the possibility of a further rally to 91.16.

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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