The U.S. Dollar is called to open slightly better against most major currency markets this morning in a continuation of the move which began Sunday night.  At that time traders pinned the start of the rally on the potential economic rift between the U.S. and China.  With China accusing the U.S. of protectionism tactics, some traders felt that it was becoming too risky to continue to press the Dollar to the downside.  Other traders felt that last week’s Dollar weakness was overdone and executed under thin trading conditions.  Finally, some traders still believe the Dollar should be sold simply because of the record low interest rates but have chosen to lighten up positions ahead of today’s key U.S. economic reports.

Buying the Dollar because of the potential economic rift between the U.S. and China seems to be a highly speculative move because of an exaggeration of the outcome of a trade war.  Basically, a trade battle based on the accusation of protectionism against the U.S. by the Chinese government is not likely to happen simply because both countries do not want to risk the curtailment of their respective economic recoveries.  Both the U.S. and China have too much at stake at this time to start any kind of a trade war.  China needs the U.S. to buy their goods and the U.S. needs China to continue to fund our debt.  Although the U.S. may give in at some point and offer some economic concessions to appease the Chinese government at this time, do not expect too much to come of this current war of words.

Technical factors such as an oversold Dollar may be a stronger reason for the U.S. Dollar strength overnight.  Last week’s sell-off in the Dollar may have been traders taking advantage of thin market conditions and the lack of a major buyer in the market.  Now that it appears that major players have come back to the market after a summer recess, traders seem to be willing to concede some of last week’s gains to help put the Dollar back to a position that better reflects the global economic conditions.  

Finally, although record low interest rates will keep the pressure on the Dollar over the long-term, last week’s selling pressure may have been too excessive and not a true reflection of the global economic condition.  There may be a time in the future for investors to chase after higher-yielding assets, but last week’s pounding of the Dollar may have been too much too soon.  Traders are likely to evaluate global economic conditions with more scrutiny before committing as heavily to a short Dollar as they did last week.

This morning traders will be focusing on three key U.S. economic reports: Retail Sales, Business Inventories and the Producer Price Index.  Traders expect to see a pick up in retail sales because of last month’s cash for clunkers program.  Business inventories should also see a rise as companies begin to increase inventory in response to the improving economy.  
This morning the December Euro is called flat to lower despite news that German Investment Confidence rose to the highest level in more than 3 years in September.  Confidence in the Euro Zone economy is growing but last week’s strong rally may have made the Euro too pricey for investors at this time.  A sudden surge in U.S. equity markets could trigger a turnaround in the Euro later in the day if there is greater demand for higher risk assets.

Traders continue to put pressure on the December British Pound following last week’s short-covering rally.  The U.K. economy has a long way to go despite news that home prices rose.  Traders feel the recent action by the Bank of England to leave interest rates and bank reserve rates unchanged is a better reflection on the U.K. economy.

Finally, the December Canadian Dollar is under pressure once again.  Lower oil prices have raised the concerns of traders since crude oil is a large part of the Canadian economy.  Traders are also concerned about rallying the Canadian Dollar too high, too fast because of the possible negative effect on the economy.

U.S. equity markets are called higher this morning.   The U.S. stock market continues to be the best game in town because of the improving economy, the large amount of cash on the sidelines and the desire of money managers to chase this market higher.  Until there is a dramatic turnaround to the downside into the close, look for the trend to continue.

U.S Treasury markets are expected to feel downside pressure as the lack of global demand continues to force yields higher in order to make bonds and notes more attractive.  

December Gold is trading under pressure this morning because of the stronger Dollar.  This is most likely a short-term set-back because of overbought conditions following the strong rally over the past two weeks.  The main trend is up but current lofty price levels may force investors to wait for lower prices before re-entering on the long side.

December crude oil is called better this morning following three days of selling pressure.  This market seems content with trading inside of a range as investors wait for a change in the supply and demand picture.  At this time, demand remains steady to lower while inventories are still high.


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