Today was very much about the US Dollar.  It gapped up and created a candle that suggests some backing and filling may be necessary.

It seems the bad news on the financial services front was trumped by the Dollar news.

This chart of UUP (bullish Dollar index against a trade weighted currency basket) shows the gap, and the weak candle formation.  It also shows an overbought condition in the indicators.

In concert with the sharp rise in the Dollar, US equities rose, while non-US equities fell.  Oil and other commodities fell, in part due to the Dollar and in part due to declining expectations for the global economy.  US REITs rose, perhaps in part due to lower energy prices and perhaps in part due to lowered probability of interest increases.  US bonds didn’t really seem to know quite what to do.  Gold declined, most likely as a sympathetic inverse to the Dollar move.  The following chart of ten ETFs illustrates these points.

click image to enlarge

Experts are divided as usual, illustrated by these comments from various articles in Bloomberg today:

The euro fell the most in almost eight years, pushing the currency to a six-month low against the U.S. dollar, as traders pared bets the European Central Bank will raise interest rates as the economy slows.

UBS foreign-exchange strategists forecast 13 percent appreciation of the dollar versus the euro to the end of 2009

“This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,” said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. “The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.”

The Dollar Index on the ICE futures exchange reached 75.903 today, the highest since Feb. 21.

Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co., said the U.S. government’s efforts to support Fannie Mae and Freddie Mac will lead to greater Treasury issuance and a weaker dollar.

The euro’s decline below $1.53 and the break of the 200-day moving average at $1.5226 “marks a significant change in sentiment for the dollar,” pointing to a further decline to $1.46, Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., wrote in a report today. It was the first time the euro fell below the 200-day moving average since 2006.

Since reaching a record high of $1.6038 on July 15, the euro has dropped 6.5 percent. The so-called trading envelopes, which measure how far from the mean a price has strayed, show the euro’s decline has doubled the typical changes versus the dollar in the past 20 days.

“The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,” said David Woo, global head of currency strategy at Barclays Capital Inc. in London. “None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.”

The individual currency charts for the EUR/USD and USD/JPY, show the Euro seeming to top and suddenly partially collapse, and the Yen steadily declining relative to the Dollar.

[Note:  a falling EUR/USD chart indicates a rising USD, while a rising USD/JPY chart indicates a rising USD.  This oddity has its origins in currency market charting traditions.]

Yes, it was a Dollar day.  Given the unusual Dollar move, we would not be surprised to see some retracement on Monday or Tuesday.  Then again anything could happen when markets swing as widely as they have recently.

All the investment furniture is being rearranged, but we can’t be sure just how.

Richard Shaw
QVM Group LLC

Last 5 posts by Richard Shaw

• Hoped for Stocks Bottom Pierced - November 19th, 2008
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• US Capital Markets Composition - November 17th, 2008
• US Stock Market Equity Allocation Weight - November 17th, 2008
• Lower Prices Now - Massive Inflation Later? - November 12th, 2008