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Forex News: Dollar Posts Biggest Weekly Rally in 6 Months

John Kicklighter

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Dollar Posts Biggest Weekly Rally in 6 Months

Market conditions can supersede both fundamentals and technicals – a truism we witnessed this past week. Typically, the dollar’s position as the preferred reserve currency would have leveraged a selloff with the S&P 500 posting its biggest rally in 13 months. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) enjoyed its strongest advance in six months over the same period and closed at its highest level since July 25. This unusual correlation between underlying risk trends and the safe haven dollar was facilitated by both the extremely low levels of speculative participation through the passage of the holiday period as well as an intense focus on the on the outcome of the US Fiscal Cliff.

Though pushing the decision beyond the technical deadline, the US government managed to hammer out a solution to the impending doom of automatic tax hikes and spending cuts. Naturally, removing the risk of a sure push into recession for the world’s largest economy lifts a serious cloud of uncertainty and bolsters risk appetite – thereby driving equities and other ‘riskier’ assets higher. However, the dollar also benefits from this turn as the threat of a critical sovereign credit rating downgrade (a move that hits at the dollar’s core value as the benchmark currency) evaporates as well. That being said, the positive correlation between risk trends and greenback is unlikely to last for long. A relief rally for the dollar via reduced rate cut fears has an exceptionally short shelf life. That doesn’t mean we should expect the dollar to simply tumble into a new bear trend though. The ‘solution’ offered up for the Fiscal Cliff, was merely a band aid that carries us over to the bigger threat of a standoff on raising the debt ceiling. The Treasury runs out of extraordinary means for preventing the US to breaching its debt cap sometime in mid-February and the so-called ‘sequestration’ – or $110 billion in automatic spending cuts – is set for March 1. This can easily set risk trends on fire once again and thereby benefit the safe haven status of the dollar. The deciding factor is whether investors look ahead or enjoys the brief calm.

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