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Dollar Drifts Lower Against Euro but USDJPY Surges
John Kicklighter

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Dollar Drifts Lower Against Euro but USDJPY Surges

There were two different views of the dollar. Looking at the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar), we find the currency marking its highest close in three months having posted a tense reversal from the closely-watched 10,000 level. Yet, when we look across the majors, the single currency doesn’t look nearly as convincing. In fact, the dollar fell against more than half of its major counterparts through Wednesday with notable runs from EURUSD (posting an aggressive intraday reversal) and GBPUSD (now working on its sixth consecutive advance). Where does this disparity come from? A lack of conviction - or ‘momentum’ to the trader.

It is true that more than half of the majors (the most liquid, dollar-based pairings) were showing losses for the benchmark currency. However, the average loss was only 0.1 percent. Gain or loss, these pairings were showing moderate moves through the day – that is with the exception of USDJPY. A pair that doesn’t have its roots in tempered risk appetite trends, USDJPY was free to reflect unfettered changes in underlying strength. The 1.0 percent rally for the pair was more a reflection of yen weakness, but this pair is still historically imbalanced and will continue to gradually trend in this direction for months to come. Moving away from the highlights, the more important takeaway on the day was the general level of activity.

We know that the world’s premier safe haven currency performs best when global investors are scrambling for a harbor from rough financial seas. The outlook for growth, yields and financial stability are all certainly still unbalanced; but to be a dollar driver, they must be active. That is job for general market conditions. Traders must be fretting these considerations. However, fear usually abates when participation fades – and that is exactly what we are facing. With Wednesday’s close, the US market is essentially offline for the rest of the week (due to the Thanksgiving holiday). Though only one region of global trading, this particular segment accounts for a considerable portion of speculative activity and it is often the session where we see new risk-based trends developed. We often look at fundamentals for our bearings as traders, but it is market conditions that determines whether event risk or technical break will carry influence. And, given the distinct relationship between volume, volatility and investor sentiment; a slight ‘risk on’ bias (dollar bearish) is easy to maintain. Bottom line, though, big moves are unlikely.

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