U.S. Dollar Finishes Higher for Week after Posting 14-Month Low

After a sharp sell-off earlier in the week, which took a basket of currencies to a 14-month high versus the Dollar, the greenback managed to post a small gain.

After a sharp sell-off earlier in the week, which took a basket of currencies to a 14-month high versus the Dollar, the greenback managed to post a small gain. The strong comeback in the Dollar was helped on Friday by an early sell-off in stock index futures and a weaker than expected consumer confidence figure.

About mid-week, the Dollar was under pressure because of a FOMC minutes report which suggested the Fed had no basis for raising interest rates in the near term, despite comments from Bernanke the week before. The minutes showed that the FOMC was considering increasing the amount of stimulus to help the economy out of recession. Fed Chairman Bernanke implied the week before that the Fed was already considering a tight monetary policy should the economy show signs of recovering. Bernanke’s comments supported the Dollar, but the FOMC minutes gave traders the green light to sell Dollars.

While weakness is in the Dollar seems justified, the pace of the decline should be of some concern because global economic conditions are not that great to warrant an outright attack on the Dollar. At times it seems Forex investors are ignoring weak economic reports and are instead focusing on the upside momentum in the equity markets to be their guide. Taking long positions against the Dollar because of the strength in the stock market could backfire on traders particularly in the Euro if global investors decide to begin limiting their demand for higher yielding assets.

The Euro closed up on the weekly chart, but managed to form a daily closing price reversal top on the daily chart. Based on this pattern, a follow-through to the downside next week could trigger a short-term correction to 1.4724 to 1.4781. Traders should also watch for comments from the European Central Bank regarding the rapid rise in the Euro and its possible detrimental effects on the Euro Zone economy.

The biggest gain for the week was posted by the GBP USD. After trading down to 1.5706 earlier in the week, the British Pound rallied sharply higher. Speculation that the Bank of England would end its asset buyback program earlier than expected helped to ignite the rally. This speculation was triggered by positive comments which suggested the program was working exactly as expected.

The USD CAD finished lower for the week, but in a position to rally further because of a reversal on the daily chart late in the week. Traders were nervous as this market approached parity with the U.S. Dollar and because of comments from Prime Minister Harper. In a statement, he said he was concerned about the rapid rise in the Canadian economy and its possible negative effects on the economy. On Friday, the USD CAD received a boost from another bearish Canadian CPI report.

The USD CHF is poised to mount a short-covering rally. Weak Swiss retail sales helped boost the Dollar versus the Swiss Franc on Friday. Buyers stepped in when the market approached the July 2008 bottom at 1.0010. The daily chart indicates a rally to 1.0569 to 1.0676 is likely.

The USD JPY rallied this week, buoyed by comments from Finance Minister Fujii who retracted comments from earlier in the month that he favored a strong Yen. Current data suggests that Japanese investors are betting on a recovery in the Dollar. The current chart formation suggests a rally to 92.88 to 94.04 is likely over the short-run.

Demand for higher yields and speculation of interest rate hikes helped to drive the AUD USD and NZD USD higher earlier in the week. Both markets reached 14-month highs during the rally. A sharp break in equity markets early on Friday helped trigger a profit-taking break in the Aussie and Kiwi as traders feared the start of the long awaited correction in U.S. equity markets.