U.S. Dollar Under Pressure but Investors Still Jittery over European Banks

The U.S. Dollar is giving back some of Tuesday’s gainsovernight but investors remain jittery over European bank concerns.

The U.S. Dollar is giving back some of Tuesday’s gainsovernight but investors remain jittery over European bank concerns.

There are no major U.S. economic reports this morningwhich may mean increased volatility early. Later in the day, the FederalReserve releases its Beige Book. This report will offer assessments ondifferent regions of the economy by the central bank’s member banks and is usedby the Fed to determine interest rate policy at its regular meetings.

While not expected to have a major influence on the Dollar’sdirection today, it is likely to clarify the Fed’s recent decision to leaveinterest rates at historically low levels and the reasoning behind the FederalOpen Market Committee’s decision to use the proceeds from its mortgageinvestments into Treasury Bonds.

The Japanese Yen hit a 15-year high versus the U.S. Dollaron Tuesday as investors shed risky assets. Safe haven flows partially triggeredby a report in the Wall Street Journal sent cautious traders scrambling thismorning for protection, driving down the USD JPY.

The WSJ report brought up an issue that had been buriedsince July 23 when Europe released its bankstress test results. If you recall, analysts were expressing concerns about themethodology of the tests. Traders ignored these concerns at the time andcontinued to drive the Euro higher for another two weeks before finally toppingat 1.3334. Tuesday’s Journal article said that stress tests conducted onEuropean banks earlier this summer understated some lenders’ holdings ofpotentially risky government debt.

Technically, this morning’s sell-off in the USD JPY took outthe August 24 bottom at 83.59, before finally stopping at 83.51. In my opinionthe lack of follow-through to the downside following the break through thebottom is a sign that investors still feel the Japanese government or the Bankof Japan is poised to take action to prevent the high priced Yen from hurtingthe export market and damaging the economy.

This doesn’t mean the USD JPY will turn its trend around,but it probably indicates that the bears will take a cautious approach whenpressuring this market rather than applying heavy selling pressure. This typeof trading is likely to prevent whip-saw type action that occurs when a marketgets oversold too fast.

Concerns over the health of the Euro banking system may havecaught U.S.traders by surprise on Tuesday. Coming back from a three-day week-end, manytraders had expected the EUR USD to continue last week’s rally partially fueledby Friday’s better than expected U.S. Non-Farm Payrolls report.

What yesterday’s WSJ article did was plant a seed of worryin the minds of investors who believe that the poor performance of the U.S. economy isthe only problem to be concerned about now. While yesterday’s trading actiondoesn’t mean its time to bail on the Euro and buy the Dollar, it does indicatethat perhaps long Euro positions have to be pared as a pre-caution againstanother possible round of sovereign debt selling pressure.

Technically, the EUR USD looks pretty busy. Despite Tuesday’ssell-off, the main trend on the daily chart remains up with a pair of swingbottoms at 1.2625 and 1.2587 still intact. Once these bottoms are violated, themain trend will turn to down.

A break through 1.2587 will also mean that a key 50% levelat 1.2605 will have been violated. This action will set up the market for afurther decline and a possible test of the .618 Fibonacci level at 1.2433.

To some traders looking at the retracement levels, itappears the market will accelerate to the downside once 1.2605 is violated.This may not be the case, however, because a major uptrending Gann angle at1.2536 may impede the break and perhaps trigger a counter-trend technicalbounce.

On the upside, Monday the EUR USD found resistance on adowntrending Gann angle from the 1.3334 top at 1.2882 on Wednesday. The closingprice reversal top formed at 1.2919 following a test of this angle wasconfirmed on Tuesday. The first objective of this pattern at 1.2773 was reachedthis morning. In fact it was exceeded, indicating that further weakness islikely.

Unless some high ranking official refutes the Wall StreetJournal article questioning the risky government debt held by European banks, awall of worry is likely to be built along with short positions by hedge funds.This could lead to the start of a prolonged move down in the Euro.