Dollar Benefits From Being Less Ugly

The US dollar rose against all the major and most of the emerging market currencies last week. The Dollar Index made a new marginal high for the year. Although US jobs growth disappointed in November and the flash Markit PMI and manufacturing output was weaker than expected, poor data abroad helped underpin the dollar by default.

UK's Prime Minister survived a challenge from within her party, but the way forward is not clear and is a source of pressure on sterling. Despite the decline in US yields and increased equity volatility, the dollar has been resilient against the yen. Last week's 0.6% gain is the third increase in the past four weeks. 

Dollar Index 

The disappointing EMU flash PMI and the 0.9% rise in the components of US retail sales that feed into GDP helped lifted the Dollar Index briefly above 97.70 to a new high for the year. It recorded an outside up week, meaning it traded on both sides of the previous week's range and closed above the previous week's high. The 97.85 area corresponds to a key (61.8%) retracement of last year's decline. A convincing move above it lends credence to our argument that the 2017 decline was corrective in nature. Since September 21, the Dollar Index has fallen in only three weeks - one week a month in October, November, and thus far in December. Support is seen in the 95.80-96.00 range. If the anticipation of a dovish FOMC is misplaced as we expect, dollar pullbacks at the start of the week will likely be reversed by the end. 


Draghi's acknowledgement that the risks were moving to the downside sparked some euro losses, as has been the case every time the ECB has met this year but once (September). However, it took the disappointing flash PMI that saw France's measures fall below the 50 boom/bust level and Germany weaken to send the euro below $1.1300. It fell to $1.1270, holding just above the late November low, but closed back above $1.13. Resistance is seen in the $1.1340-60 area, where the five and 20-day moving averages converge with the pre-weekend high and a 50% retracement of the recent decline. The $1.1185 area corresponds to a key (61.8%) retracement of last year's rally.

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Read more by Marc on his site Marc to Market.

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