What to Expect for the US Dollar on Monday (page 1 of 2)

US Dollar - The last few trading days were suppose to be quiet with most US and Japanese dealers out for the holiday. However it has proven to be anything but that. In fact, we have not seen this degree of volatility in at least a month. The US dollar has completely melted down with the Euro and British pound hitting a yearly high against and the Japanese Yen hitting a 2 month high. The triggering of stop loss orders on Friday has intensified carry trade liquidation in a low liquidity environment.

The EUR/USD's move from 1.2975 to 1.3075 in 10 minutes at the European open is a clear confirmation that flow rather than fundamentals is to blame. There was no US data released today and the financial markets that were open all closed early because of the holiday. Comments from Chinese officials about the need for more flexibility in the Yuan and the country's currency policy are certainly not helping. Interestingly enough, this was exactly what happened in 2004 as well. The US dollar began to breakdown after two weeks of consolidation on the eve before Thanksgiving.

Then on Thanksgiving Day, the EUR/USD rallied 100 points. The move extended even further on the Friday after Thanksgiving and on the Monday when everyone returned from their holidays, the move actually failed to extend much further. Instead, the pair consolidated for a few days as EUR/USD longs took more profits off the table while traders that were short banked their massive losses and quietly licked their wounds. Unlike the past week, we do have a very busy trading week ahead of us. There are a number of central bank officials speaking from around the world including Fed Chairman Ben Bernanke who will be talking about the US economic outlook. Data wise, we are expecting data from the manufacturing and housing market sector along with consumer confidence and third quarter GDP.

Euro and Swiss Franc - In the last two trading days, the EUR/USD has surged over 200 points. The currency pair is now trading above what we suspect is the European Central Bank's comfort zone. With only 7 trading days to go before the ECB meeting, if the EUR/USD does not fall back below 1.30, the central bank has no choice but to signal to the market that the December rate hike will be their last and that 3.50 percent interest rates is the peak. Not only does the strong Euro pose a risk to growth, but it also relieves inflationary pressures, which will give the ECB a good reason to shift gears.

German exporters actually attempted to downplay the move by saying that they have no problem with the Euro above 1.30, but they do want to see the ECB take action if the currency manages to rally up to 1.40. Whether German exporters like it or not, the strength of the Euro will have an impact on their businesses. Just as New Zealand reported a record trade deficit yesterday due to the strength of the kiwi, we expect the Eurozone to also begin to see deteriorating economic data, particularly as it pertains to trade.

Economic data released this morning confirmed that inflationary pressures are indeed subsiding with German import prices falling for the second month in a row. French business confidence also came out softer, which is hardly a surprise given the recent trend of weaker economic data. What was surprising was the uptick in the German IFO report on Thursday. Businesses were more optimistic about the future which indicates that they expected a continued acceleration in economic activity.

In the week ahead, The Eurozone is also releasing a number of key data releases such as French and German unemployment, German retail sales, Eurozone CPI as well as regional PMI surveys.