Lower global equity markets are helping to push the U.S. Dollar higher as investors shun risky assets for a second consecutive day. Traders began getting nervous earlier in the week after Fed Chairman Bernanke mentioned the level of the Dollar in a speech. This was followed by supportive comments from European Central Bank President Trichet who used a speaking opportunity to announce his agreement with Bernanke and to try to talk up the Dollar.
The recent pace of the decline in the Dollar has been giving traders a clue that sentiment may be shifting. This shift started at about the same time that China was talking about changing the value of the Yuan. While China remained hard-nosed about its currency this week when pressed by President Obama to change its ways, speculators were beginning to bet that China would eventually cave in to international pressure and make a small adjustment in how it pegs its currency.
The combination of comments from Bernanke and Trichet along with an easing of China’s currency pricing policy seems to have given traders an excuse to lighten up their short Dollar positions. Speculators are also starting to talk about a possible short squeeze in the Dollar which could trigger a strong short-covering rally.
The stronger Dollar is putting pressure this morning on both equity and commodity markets as traders dump risky assets for the safe-haven Dollar. Equity markets were down in Asia and Europe. This weaker trend is expected to spillover to the U.S. stock markets. The December E-mini S&P 500 is in a position to post a weekly closing price reversal which could be a strong sign that sentiment will be shifting to the downside for the next 2 to 3 weeks.
Treasury futures are trading higher this morning as money is being moved out of the risky stock market into the safety and security of Treasury Bonds and Notes. This action is helping to drive down yields. The current weak state of the economy is giving traders the confidence to stay long government debt since interest rates should remain low for a prolonged period of time.
December Gold is trading lower because of the stronger Dollar. Yesterday the market broke sharply to $1130.00 before recovering the loss to close higher. Last night, the rally fizzled short of a new high. This created a secondary lower top on the charts and indicated that the selling may be greater than the buying at current levels. Downside pressure through $1130.00 could accelerate this market down to $1119.00.
Look for pressure to remain on January Crude Oil. The stronger Dollar and weaker equity markets are helping to convince speculators to think about the short side of the market. The weak economy is expected to continue to help erode demand. This should increase supply which would be another bearish sign that lower prices are to follow.
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