U.S. Dollar finishes lower under tight trading conditions

The U.S. Dollar finished lower against all major currencies as trader demand for risk helped to pressure the Greenback.

The U.S. Dollar finished lower against all major currencies as trader demand for risk helped to pressure the Greenback. The weakness in the Dollar was attributed to optimism in the Euro Zone over the potential positive impact of the new European Union and International Monetary Fund bailout proposal for Greece. Throughout the day, the major theme was demand for risky assets as equities, gold and crude oil posted strong gains, supporting the commodity-linked currencies.

The EUR USD closed up for the second consecutive day as weak shorts continued to cover their positions in response to last week’s EU/IMF Greece bailout agreement. The new plan is designed to help Greece should it be unable to find financing in the capital markets. The proposal amounts to a pledge to help Greece out of the Euro Region’s biggest deficit if it runs out of traditional financing options.

On Monday, Greece issued new 7-year financing priced in Euros. This $7 billion offering was the first test as to how investors perceive the viability of the aforementioned bailout plan. According to reports, the bond issue went off without a hitch although the Greek government paid about a 3.10 basis point premium to complete the sale. The relative ease of the bond issue helped relax tensions allowing the Euro to remain firm throughout the day

The charts indicate the Euro has formed a new main range at 1.3817 to 1.3267. This range creates an upside target at the retracement zone at 1.3542 to 1.3607. According to the CFTC Commitment of Traders Report, as of March 23rd, hedge funds and large speculators account for a record net short 74,917 positions. The large number of shorts, the news regarding Greece and the chart formation all suggest that this market is ripe for a short-covering rally. Fresh buyers are likely to remain scarce until the Greek economy can prove itself.

The stronger Euro pressured the USD CHF on Monday. The higher the Euro rises, the less likely the Swiss National Bank is going to intervene to protect its economy and currency. A better Euro will also allow the SNB to focus on the possibility of an interest rate hike at its next meeting.

Demand for riskier currencies helped to boost the GBP USD. Despite today’s rally, this currency pair remains in a downtrend, but is beginning to show signs of the formation of a secondary higher bottom at 1.4797. Regaining a key retracement area at 1.5010 to 1.5080 could trigger additional short-covering, but the trend will remain down until 1.5381 is violated.

Fundamentally, although the British Pound is up because of expectations of improvements in Greece, the U.K. continues to face fiscal problems of its own. The wide deficit as well as the possibility of a debt rating cut, continue to weigh on the currency. Uncertainty regarding the upcoming election and the possibility of a “hung Parliament” continues to linger. Early Monday the S&P Corp. said the U.K. credit rating would remain unchanged. This news helped underpin the market somewhat throughout the day, but did not encourage further short-covering.

Signs that the global recovery is gathering momentum continued to underpin the USD JPY. Although this market is technically overbought after last week’s surge to the upside, buying could resume this week if U.S. equity markets continue to push higher. Additional pressure could be on the Yen following strong rallies in gold and crude oil. The charts indicate that the January top at 93.77 remains the next likely upside target. 91.35 should provide good support if tested. The inability to breakout to the upside in the U.S. equity markets helped hold the Dollar/Yen in a range most of the session.

On Monday, greater demand for higher risk assets helped stop the USD CAD rally in its tracks. The long-term downtrend could resume as traders begin to price in the strong possibility of an interest rate hike by the Bank of Canada. Speculators also bought the Canadian Dollar in anticipation of a better U.S. Non-Farm Payrolls Report on Friday. A strong U.S. labor market is likely to benefit the Canadian economy as well as the U.S. This would help bring the BoC closer to hiking interest rates before the Fed.

Expectations of better retail sales this week and talk of another interest rate hike helped to boost the AUD USD. The overnight action and follow-through to the upside during the New York session are indications that demand for higher yielding assets has returned.

Over the week-end, Reserve Bank of Australia Governor Stevens said house prices are “getting quite high”. This signaled to traders that interest rates may need to be increased further. Stevens also said that borrowing costs need to be returned to “normal” levels. Both of these comments encouraged traders to buy the Aussie. Today’s strong move in the currency helped this market close above a key retracement zone at .9126 to .9155.

Renewed buying in higher risk assets also gave the NZD USD a boost. The higher-top, higher-bottom formation suggests that the main trend is likely to continue up. Regaining a 50% price level at .7124 could trigger an acceleration to the .618 level at .7199. A break out over the last swing top at .7178 will reaffirm the uptrend. There is also some speculation that the Reserve Bank of New Zealand may raise interest rates as early as June.

Given the absence of any major economic reports until Friday, look for traders and speculators to continue to focus on Greece and the other sovereign debt issues lingering in the Euro Zone economy.