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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (9524)	11/17/2002 10:25:03 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Dollar teetering on the brink of bigger declines Monday November 11, 6:12 PM EST By Daniel Bases NEW YORK, Nov 11 (Reuters) - Technically speaking, this week could prove a major turning point for the U.S. dollar and whether it will embark on a long-term downtrend after being stuck in a tight range for the last four months. Analysts point to Friday's drop in the dollar index -- a broad measure of the greenback's value versus a basket of major currencies -- through the rising trend line that has been in place since April 1995 at the 104.37 level. "The importance of this technical break does open the potential for a more extended dollar decline," said Robert Sinche, global head of foreign exchange strategy at Citibank. On Monday the dollar index <=USD> touched a new four-month low of 104.12 before rebounding to a session high 104.74. The seven-year upward trendline provided the bottom of the range, while the 200-week moving average, currently at 109.17, has provided a topside barrier since late June. "Although the range between these two critical barriers is only about 4 percent wide, the dollar index had stayed between them for about 4-1/2 months ... The break is almost like a market signal telling you which way the market wants to go," Sinche said. The trend line break would have to last for more than a week and extend through support levels below the 104 mark before analysts would warm to the idea of an extended dollar decline. But if the dollar index did push downward, it might mean the flow of cash into U.S. assets that supported the dollar through recession, a burst equity bubble, a widening U.S. trade deficit and a growing interest rate differential gap with Europe is finally exposed to these traditionally corrosive elements. Last week's Federal Reserve decision to cut the benchmark fed funds rate 50 basis points to 1.25 percent put the rate differential with Europe at its widest point since 1994. "In terms of the dollar index, the outlook remains extremely bearish," said Peter Rehmer, technical analyst at Elliott Wave International." "From the high in July 2001, we will have a conclusive trend defining bearish five wave declining pattern once the dollar index breaks below the July 19 low of 103.54," said Rehmer, who would then expect a downside target of 99.65 for the index. He then expects a counter-trend bounce to 109. If the dollar index extends the decline this week and the euro shows a resiliency of its own versus the dollar in spite of some bearish euro technical indicators, markets might have the smoking gun needed to give them an excuse to send the greenback even lower. RISK REVERSALS AND THE IMM "This week is particularly important. There are a number of things in the short-term that would traditionally weaken the euro," said Citibank's Sinche. Recent data shows one-month euro/dollar risk reversals are at their highest levels since late June at 1.1/1.4 percent in favor of euro calls, indicating the market has an unusually strong upward bias for the euro. Risk reversals, which measure the premium investors are willing to pay to buy call options over put options, can serve as contrarian indicators at extremes. In addition, the latest IMM report showed currency speculators extended their holdings of euro/dollar futures, also to their highest levels since June, which is providing ammunition for a euro sell-off. Extreme net long speculative positions often presage a decline in the currency. "If the euro doesn't fall that would tell us something bigger is going on here than simply a cycle," said Sinche, who referenced the likely slowdown of U.S. capital inflows. CAPITAL FLOWS While some analysts believe the big element in a dollar decline is the lessening of capital flows, one analyst says global investors continue to risk capital in U.S. assets, but not in the U.S. currency. "(U.S.) Treasury data shows strong capital inflows into U.S. assets ... but our data is showing that global investors are aggressively selling the dollar on a forward basis because they don't want to assume the exposure of the U.S. dollar on their assets," said Brian Garvey, senior currency strategist at State Street Global Markets in Boston. According to State Street's research, the forward selling has been largely against the yen and Asian currencies. That has led the firm to believe investors have yet to move to overweight positions in the major European currencies. "The forward selling has a much better predictive power than just looking at spot currency cash flows. We continue to think the dollar is risky and low yielding and plan on increasing our underweight position on the dollar," Garvey said. ©2002 Reuters Limited.