U.S. Dollar Strengthens after Stock Market Backs Away from Top

The U.S. Dollar is recovering after hitting a 15-month low against a basket of currencies this morning.

The U.S. Dollar is recovering after hitting a 15-month low against a basket of currencies this morning. A break from the top in the equities markets seems to have triggered a short-covering rally. Concern that the demand for higher risk assets may be too strong is most likely leading to the downside reaction in the other currencies.

The EUR USD failed just short of the recent top at 1.5062. Traders have been hesitant to maintain upside momentum each time it’s neared this level over the past few weeks. Fear that a move over this price may induce a stern warning or even stronger action from the European Central Bank may be triggering this adverse reaction by investors.

Comments from Bank of England Governor King regarding additional quantitative easing and a lower British Pound, is putting selling pressure on the GBP USD. Although the BoE believes the U.K. economy is beginning to recover, comments suggest that lower interest rates, government spending and quantitative easing may not be enough to maintain the recovery. King feels that additional measures may have to be taken because strength remains “highly uncertain”.

Oversold conditions are helping to contribute to the turnaround in the USD CHF and USD JPY. The intraday topping action in the equity markets is encouraging shorts in these two currency pairs to lighten up their positions.

With the stock market backing off its high and crude oil treading water, selling pressure is hitting the USD CAD. Technical factors are also contributing to the short-covering rally after this market reached a key retracement level at 1.0446. Regaining 1.0522 will put this currency pair in a serious position to rally further.

The break in the equity markets is contributing to profit-taking in the AUD USD and NZD USD after strong rallies the past three days. Traders may sell these markets off for 2 to 3 days before re-entering on the long side. Early this morning China reported that factor output increased but imports and exports fell. This may also be contributing to the weakness as both New Zealand and Australia are major trading partners.