(Kitco News) – The U.S. dollar has staged a strong rally for the past two days, particularly against the euro, and that has some analysts believing the weakness the greenback saw in January and early February is over for the time being.
But many are being cautious on how much strength the dollar has on its own, considering the still-shaky outlook for the U.S. economy and the continuation of the Federal Reserve’s second quantitative easing program. On Friday, the non-farm payrolls data for January showed only 36,000 jobs were created when analysts expected anywhere from 140,000 to 150,000.
Further, there remains suspicion by the investing class about fiat currencies, which is one reason why market analysts said any rises by the dollar should not cap strength in gold prices. Usually a rising dollar can limit gains in gold since it is dollar-denominated, but both can rise at the same time, especially in safe-haven events.
“Dollar deflation is more likely than not (longer term) and that will add fuel to gold,” said Sterling Smith, commodity trading adviser and market analyst at Country Hedging.
The dollar held support at 77 on the dollar index, a key level of technical chart support. Andrew Chaveriat, technical analyst at BNP Paribas, said the 77 region is the 76.4% retracement of the November-January rise. Not only that, but the dollar held at various levels of support versus other key currencies, including the Japanese yen and the Swiss franc. Furthermore, the euro, the British pound and the Australian dollar were unable to pierce significant technical chart resistance areas versus the dollar.
“Having this week’s U.S. (dollar) decline simultaneously encountering strong medium-term support increased the odds for at least a short-term pause/pullback, if not a multi-week reversal, versus many of these currencies,” Chaveriat said.
Shawn Hackett, president of Hackett Financial Advisers, said he thinks the dollar can rally further against the euro. The euro has been unable to crack resistance at $1.39, just under the top of the recent range between $1.20-$1.40, he said. “It’s made a lower high and I wouldn’t be surprised to see it make a lower low. This was just a rebound in a bear market for the euro,” he said.
Opportunities lie in the current market action, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
“A crack in the dollar bear case has crystallized and there is a potential opportunity here for medium-term investors to reduce short-dollar exposure or increase hedges on non-dollar exposures,” he said.
Despite the powerful rally in the euro during January, he said worries over the fiscal health southern European countries could come again. He also noted in the euro options market that “euro longs have been come increasing nervous, especially during its latest advance.”
Chaveriat said support for the euro comes in at $1.35, while Chandler sees a potential pullback to the $1.3250-$1.3350 range in the near term.
Smith said key support for the euro comes in at $1.3534, noting the chart for the euro “looks heavy.”
Hackett said while he doesn’t favor any currencies, ultimately he is a euro bear versus the dollar. Specifically, he cited the continued problems Europe has to consider with its southern-tier countries’ debt. He said while the Fed is busy printing money to support the U.S. economy, Europe has further to go. “The dollar is not a great place to be, but with the euro, we don’t know how much money printing they have to do. All the chips haven’t fallen there,” he said.
But before the dollar bulls get too excited, Chandler said the extended downside is limited because the euro market positioning does not seem extreme, the Fed continues its bond buyback, and any resolution by the European Union regarding plans to deal with its issues can be pushed back into late March. Down the road, the U.S. will feel renewed skepticism about its own U.S. house as debate regarding lifting the debt ceiling approaches.
Now that the dollar has held support at 77, the next area of resistance is 78.50, but Smith doesn’t see much further upside. “It was oversold and due for a bounce. It was down every day since Jan. 10 with minor exceptions. I’m not sure how much life it has; it remains to be seen,” he said.
Brian Larose, technical analyst with United-ICAP, said at best, the rebound from 77 on the dollar index can be only considered constructive. “To convince us this rally is sustainable, further upside is now required,” he said.
Resistance is seen at 78.625 and 79.165, he said.
By Debbie Carlson of Kitco News [email protected]
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