U.S. Dollar Rallies; Boosted by Risk Aversion, Weak U.S. Employment Outlook

The U.S. Dollar Index made a new high for the year, boostedby the sharp sell-offs in the Euro, British Pound and the commodity-linkedcurrencies. Gains were limited slightly by the rise in the lower-yieldingJapanese Yen.

The U.S. Dollar Index made a new high for the year, boostedby the sharp sell-offs in the Euro, British Pound and the commodity-linkedcurrencies. Gains were limited slightly by the rise in the lower-yieldingJapanese Yen.

The initial catalyst behind the U.S. Dollar’s rise on Fridaywas the news that Hungaryis in the midst of a fiscal crisis of its own. This news caught many traders bysurprise because most were focused on the upcoming U.S. Jobs Data Report. After the first thrust to the upside, gainswere extended when the government reported that the number of jobs createdduring May fell far below the consensus.

Economist estimates were for an increase of about 513,000new jobs. The U.S. Labor Department reported an actual increase of 431,000.This news was bearish in itself, but the traders were really surprised when theinternals of the report showed that of the 431,000 new positions, 411,000 jobswere created by the U.S.government. This figure was primarily made up of short-term census workers.

The Euro pierced the psychological 1.20 support level,sending the single-currency to a 4-year low. The began its slide early Fridaymorning, driven lower by fresh fiscal problems from Hungary and a weak U.S.payroll figure. Concerns about Hungary’sfiscal situation initiated the break before the New Yorkopening, while the U.S.jobs data helped accelerate the move to the downside. The market weakenedthroughout the day as traders shied away from risky assets, instead favoringthe safety of the U.S. Dollar.

Technically the Euro remains in a downtrend. Friday’s moveto the downside was likely sell stops following the initial plunge and freshselling once traders became convinced the U.S. jobs data was bearish and theintra-day tone would remain bearish for the duration of the day. Thelonger-term monthly chart suggests the next likely downside target is theNovember 2005 bottom at 1.1638. Bearish traders are likely to defend the old bottomsat 1.2153 and 1.2143 in order to keep the pressure on the market.

The weaker-than-expected U.S. employment report helpedtrigger a flight-to-safety rally in the Dollar while driving investors out ofcommodity-linked currencies. Aversion to risk weakened U.S. equity andglobal commodity markets, helping to drive up demand for the lower-yieldingJapanese Yen. All three majorcommodity-linked currencies – Australian Dollar, New Zealand Dollar andCanadian Dollar – suffered huge losses, leading to speculation that this trendis likely to continue next week.

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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