Dollar advance increasingly dependant on Euro

US Dollar:

If there was any doubt that the dollar was playing out a meaningful bullish swing, that disbelief should be quelled by now. However, suspicions for the greenback seeing at least a temporary correction in the near future should not be abandoned. While the single currency may have exhibited remarkable strength over the past three weeks, its fundamental drive may be built on very specific catalysts that could easily drop their support without the proper encouragement. In assessing the situation at the start of the new trading week, we should first establish that the trade-weighted Dollar Index marked a strong follow-up rally to Friday’s surprise surge to push the currency to a fresh two-month high. At this point, the Index has rallied 7.3 percent or 550 points since hitting a 2010-low back on November 4th. For the majors, this has translated into remarkable progress. EURUSD pushed to its own two-month low after taking out an important, rising trend dating back to the early June low. GBPUSD has similarly broken down from a channel that had slowly guided the pair higher for months. Even the high yield differential for AUDUSD has failed to keep the pair from a technical break in the dollar’s favour. However, there is a particular oddity between this performance and fundamentals: the lack of a risk aversion responsibility.

DATA : Fed Chairman Bernanke speaks

Pound:

It is important to note that the pound’s performance is heavily influenced by the health of its primary counterpart – the euro. Economic and financial troubles easily bleed through these open borders. That said, there was a specific drive for the sterling in the biggest drop in housing demand in nearly two years as well as a downgrade in 2011 / 2012 GDP forecasts from the Office for Budget Responsibility.

DATA : No major data to be released today

Euro:

German Unemployment is expected to drop by 20,000 in November, showing the labour market continued to improve for the 16th consecutive month. Meanwhile, a preliminary estimate of November’s Euro Zone Consumer Price Index reading is forecast to put the annualized inflation rate at 1.9 percent, matching a two-year high recorded in October. While seemingly Euro-supportive, the outcomes may prove to generate quite the opposite effect when taken against the backdrop of festering sovereign risk woes plaguing the currency bloc. The failed jump start from the initial announcement of 85 billion euros in support for the strained EU member wasn’t doubt that officials would follow through on its enactment, rather the selling seems to be the market moving on the next issue. With that we see that Portugal is under pressure to ask for a pre-emptive bailout and Spain has seen its borrowing costs jump the most since the euro’s inception. Investors are concerned that this is more a European issue than a Ireland or Greek issue. The euro’s appeal is dependent on the whole region.

DATA : EBC unemployment and ECB President Trichet speaks

General:

Few countries retain their place at the top of the economic pile. And, while it may be a while before the Aussie dollar relinquishes its place, the data is certainly undermining its sense of superiority. Third quarter operating profit dropped 1.5 percent and the current account deficit ballooned after testing an eight-year low.

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