Is The Dollar Getting Ready To Rally?

The stock markets continue retracing to the downside, but the dollar has managed to stay steady versus the main currencies, even versus yen, which has been getting support from the rise in risk aversion. The enthusiasm for the euro has been vanishing as the european banks finish off the process of repatriating their earnings from overseas.

The global equity markets have continued falling at the start of today’s trading session. For many, this is just a correction due to the fact that the markets ended last year being over-extended to the upside. For this week we have very important fundamental data scheduled for release; for instance, today we have the inflation report from europe and for Friday we have the Non-Farm Payrolls out of the United States. It is very probable that investors are trying to stay on the sidelines until we get a reading on this week’s fundamentals in order to decide if the global optimism will indeed continue.

Regularly, when there is a rise in risk aversion in the markets, the yen strengthens, because it is considered a safe haven currency during uncertain times. Even though the dollar tries to return to the upside versus the yen for today, it has really been retracing from the highs around the 105.40 level of last week to the low of 103.92 reached yesterday. The euro and the pound are also pulling back versus the yen. Most probably, the downtrend on the EUR/JPY and the GBP/JPY will continue if global stock markets continue to the downside, especially if the Nikkei keeps retracing.

The euro has not only been suffering versus the yen, but also versus the dollar. The EUR/USD has fallen from the 1.3800 zone to the 1.3580, which it visited yesterday. The euro was rallying during the month of December due to the repatriation of earnings by european banks, but now that the process has ended, we are seeing that the interest towards the euro has been vanishing.

Even though a recent report has shown that the service sector in the United States slowed down for the month of December, the American economy is still expanding at a modest pace and factory orders for November have risen. This gives us an indication that the Fed should have no problems in starting its tapering program as they announced it; therefore, setting the stage for a stronger dollar.