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The US dollar had its worst month since May 2009 against a basket of currencies when it came under pressure after the US government released its employment data last week. The U.S. durable goods order data also forced the dollar index to fall below the key support level of 80 points over its seven month low 79.255. Such has been the pressure around the US Dollar that even better than expected GDP and jobless data have not been able to shake off the negative sentiment dragging the dollar lower. Despite concerns over the Eurozone sovereign debt re-igniting, most analysts believe that the dollar might just continue its ongoing fall against the Euro but with the dollar index nearing the bottom of a long-term consolidation pattern that began in March 2008, there are chances of a possible role reversal in the near future. The movement in the dollar index has a lot of effect on commodities and other currencies, even if it does not replicate the action of the index but the USD needs some sort of a trigger mechanism to come out of its negative sluggish cycle. Some of the points that can trigger the positive spike in the Dollar index are:

A Case For A Positive US Data Triggering Dollar Index:

Linking Economic Data Release And USD

According to BNP Economic Research, US economists tend to react quickly to data releases. When data comes in weak, expectations are scaled back lower, increasing the chance of data exceeding expectations. Hence, the surprise indicator becomes very erratic. Hence, months of positive data surprises are often followed by a months with negative data surprises. Only, when there were severe growth deteriorations as in autumn 2006, summer 2008 and the May – July period of this year will the surprise indicator run negative readings for several months. US growth expectations have been scaled down suggesting that it will not take a lot to exceed low expectations.

A Case For US-China Currency Dispute Resolution Triggering Dollar Index:

The U.S has been blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards in recent times. Both countries, however, understand that if these two giant economies start to threaten each other, the impact on the ever-slowing recovery could be enormous as China is not only an important trade partner for the US but is also the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July.

Although President Obama and Chinese Premier Wen Jiabao had earlier discussed the issue about China's currency and huge trade surplus on the sidelines of the U.N. General Assembly, the only possible way out as of now is for the US monetary authorities to scale back on their aggressive supply of USD liquidity. China can agree to a higher RMB if QE is delivered on a smaller scale than currently priced in which can trigger the USD and bond yields moving higher simultaneously. According to BNP Paribas Overnight, the comment by the Fed’s generally dovish Janet Yellen citing the risks of an aggressive widening on the Fed balance sheet points in the same direction.

A Case For Future Government Interventions Triggering Dollar Index:

Another Case in point that can trigger a positive spike in the Dollar index is positive economic data as witnessed by the recent Job Data's Impact On Dollar Index. The currency intervention by the Japanese authorities seems like a waste now that the yen has rallied beyond the intervention point. The Japanese intervened when the dollar-yen pair was at 83, but the pair closed at 81.91 last Friday.

Although the September 15th intervention was viewed by markets as a liquidity increasing operation, things have changed now as the USD short position has become wider spread and hence the market reaction on the G-10 currency front should be more pronounced compared to September and can possibly act as a trigger to change the fortunes of the sluggish USD.

However, interventions are usually seen as a temporary measure as more often than not markets return back to their previous trends as witnessed in the September 15th intervention.

Disclosure: No positions

Source: Exploring Possible Catalysts for a Positive Dollar Index