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Weakness Seen In The US Dollar

Jan. 24, 2011 7:49 PM ET
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lytman02's Blog
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Much attention was given to the stock market for the past couple of weeks. Today, however, I’d like to divert your minds for a while towards the almighty US dollar. The US dollar index (USDX) is an index that measures the value of the USD against a basket of currencies namely the euro (EUR), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), Swiss franc (CHF), and Japanese yen (JPY). The value of the index goes up when the greenback appreciates versus the above mentioned currencies (considering their weights) and vice versa.

As you can see from its daily chart above, the US dollar based on its index appears to be moving in the southern direction in the days or weeks to come. The index actually broke down from a head and shoulders pattern back in September 2010. During this time we also saw the dollar dipping against most of its major peers. The index then bottomed to a low of 75.631 in October before rallying back towards the head and shoulders’ neckline around 81.444 in just a little less than a month. The neckline, though, acted as a resistance to keep it from moving higher. Since then, the index had traded sideways within a box until it broke down a couple of days ago from a smaller double top formation. If selling pressure continues and the USDX is not able to keep its head back above 79 in the near term then it could further slide towards its downside target of just above 76.00.

On the economic side, the US’s consumer price index (CPI), which measures the change in the price of a basket of goods and services, cooled to 1.5% for whole of 2010 from 2.7% in the previous year. The core version of the account which excludes food and energy prices because of their inherent volatility only grew by 0.1% month-over-month in December for the second straight month, resulting to a year-over-year change of only 0.8%. Relatively cheaper prices actually supported domestic retail sales which grew by 6.7% in the same year which was its highest gain since it posted a 8.2% rise in 1999. The jump in retail sales helped push the country’s consumption, which accounts for about 70% of the US’s GDP, to expand by 4.0%.

On January 28, The US’s advance GDP for the first quarter of 2010 will be on deck. The US economy is seen to have grown by 3.5% following a 2.6% expansion in the previous quarter. So given the increase in retail sales which translated to the advance in consumer spending, the US could indeed hit the market’s consensus. Since the country’s CPI is only at 1.5% for 2010 which is at the Federal Reserve’s lower end of its usual target range for inflation, a better than expected economic growth would not really place a lot of pressure on the Fed for it to tighten its policies. Investors, given their upbeat outlook, would place their money away from the greenback into other assets like currencies that offer higher yields.

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