The Dollar Hits 5 Week High on Dubai and Greece Concerns

The U.S. dollar rose on Tuesday to the highest level versus the EUR in 5 weeks and gained against other major currencies, as worries about high levels of debt in Greece and Dubai led investors to buy assets that would offer protection in a crisis.

Economic News

USD – Dollar Falls Broadly against the Yen after Bernanke Comments

The U.S. currency gained some ground against the EUR Tuesday as a trickle of dollar short covering continued in the wake of better-than-expected U.S. jobs data last week, but the Dollar stayed on the back foot as Fed officials said the U.S. economy remained weak. The greenback fell against the Yen and struggled against the EUR after Federal Reserve Chairman Ben Bernanke cooled speculation of an early rise in U.S. interest rates. Bernanke said the U.S. economy still faced headwinds and unemployment could stay high for some time, playing down the impact of Friday’s stronger-than-expected jobs report and helping send yields on shorter-dated Treasuries lower.

Against the Yen, the U.S dollar fell half a percent to 89.01 yen. The Dollar hit a 14-year low of 84.82 yen at the end of November as worries about Dubai’s debt saw investors unwind risk trades funded in yen, which then sent dollar/yen down. Dollar gains were slowed down following a rally from late last week, when a surprisingly strong reading of U.S. employment had triggered some expectations the Fed may start to normalize ultra-easy monetary policy earlier than expected.

Gains in the U.S. currency were also tempered after Pacific Investment Management Co., which manages the world’s biggest bond fund, said that more USD weakness should be expected and declines in its value may help redress global economic imbalances and spur growth in the U.S. economy.

EUR – EUR Trades Lower on Concerns More European Rating May be Cut.

The European currency hovered near a 5 week low against the U.S dollar on speculation credit ratings of more European nations will be cut after Greece’s debt ranking was lowered by Fitch Ratings. Fitch yesterday lowered Greece’s credit rating one step to BBB+, the third-lowest investment grade, and said the outlook for the rating is negative.

The British pound declined to its weakest level in almost 2 months versus the Dollar on concern that Dubai’s state-controlled companies will have to sell U.K. assets to pay for loan obligations. There are also concerns that companies in Dubai, which are falling behind on debt payments, may need to sell U.K. property, according to economists. Sterling fell roughly half a percent to the day’s low of $1.6376 as the market awaited the UK government’s pre-budget report on Wednesday, which is expected to highlight the dismal state of the Britain’s finances.

Analysts said that since most investors are worried that more European countries’ sovereign ratings will be downgraded the U.S dollar will probably be bought and the EUR will likely be sold, as risk aversion prevails.

JPY – Yen Advances vs. Majors

The Japanese yen may extend its advance versus all of its major counterparts after a reduction in Greece’s debt rating by Fitch Ratings and a Dubai developer’s $3.65 billion loss discouraged demand for riskier assets. Japan’s government announced today a 7.2 trillion yen economic spending package that includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives, the Cabinet said in a statement.

The JPY also rose on speculation Japanese officials won’t act to weaken it even as they say they are concerned about the effect of yen strength on the economy. The Yen tends to strengthen during times of turmoil because Japan’s trade surplus makes it less reliant on foreign capital. The nation’s current-account surplus increased 42.7% to 1.4 trillion yen ($15.7 billion) in October from a year earlier, the Ministry of Finance said yesterday. The JPY traded at 130.01 per EUR, after appreciating yesterday as much as 2.4%, the biggest intraday gain since Nov. 27. Japan’s currency was at 88.43 per Dollar, following a 1.2% advance.

OIL – Crude Reverses after 5-Day Decline

Crude Oil prices climbed above $73 a barrel after an industry report showed U.S. supplies dropped, bolstering optimism that fuel demand in the biggest energy-consuming nation will increase. Oil rose for the first time in 6 days after the American Petroleum Institute said crude inventories fell by 5.82 million barrels. Oil fell after U.S dollar climbed against the EUR, damping demand for commodities as an alternative investment.

Oil markets have looked to wider economic data and equity markets this year for a sign of a turnaround in the economy that could bolster crude demand and drain high inventory levels in key consumers, such as the United States. Crude dropped after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will face a weak labor market and tight credit, signaling fuel demand will be slow to recover. A downward revision to the U.S. government’s forecast for 2010 global demand growth also pressured Oil prices.

Technical News

There is a fresh bullish cross forming on the daily chart’s Slow Stochastic indicating a bullish correction might take place in the nearest future. The upward direction on the 4-hour chart’s Momentum oscillator also supports this notion. Going long with tight stops might be the right strategy today.
The GBP/USD cross has experienced a bearish trend yesterday. However, it seems that this trend may be coming to an end. The RSI of the 4-hour chart shows the pair floating in the oversold territory, indicating that an upward correction will happen anytime soon. Going long with tight stops might be a wise choice.
The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the 4-hour chart’s RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upward breach occurs, going long with tight stops appears to be preferable strategy.
The USD/CHF cross has experienced a bullish trend for the past week. However, it seems that this trend may be coming to an end. For example, the daily chart’s Stochastic Slow signals that a bearish reversal is imminent. A downward trend today is also supported by the 4-hour chart’s Slow Stochastic. Going short with tight stops may turn out to pay off today.

The Wild Card

This pair’s sustained upward movement has finally pushed its price into the over-bought territory on the daily chart’s RSI. Not only that, but there actually appears to be a bearish cross on the Slow Stochastic pointing to an imminent downward correction. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.

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