Broker's Notes: US dollar trades firm and euro struggles

US dollar

The US dollar traded firm on Tuesday after a bout of choppiness, and players didn't rule out an eventual 1.5 cent retreat by the euro if some long positions grew stale and unwound ahead of expected U.S. easing. With quantitative easing from the Federal Reserve now well-priced in ahead of its Nov. 2-3 meeting, currencies have broken higher ground against the dollar, with the euro topping $1.4160 last week and the Australian dollar testing parity. But squeezing out more gains is likely to be tough until the market sees how sizeable QE will be, with one trader saying, for Tuesday at least, short-term players were simply flipping positions within tight ranges.

The dollar index firmed 0.3 percent to 77.281. Technical charts suggest that it needs to extend above its Oct. 12 high of 77.93 to signal a short-term bottom is in place after Friday's 10-month trough of 76.144. Treasury Secretary Tim Geithner gave a brief fillip to the dollar after he said the United States would not engage in dollar devaluation and also needed to work hard to preserve confidence in a strong dollar. The comment had little lasting impact beyond being a reassurance from the U.S. for investors to maintain confidence in the dollar as the world's reserve currency, after the greenback's fall of the past few months, and as tensions stir ahead of meetings of the G20 on talk of competitive devaluations.

Euro

The euro has failed to clear $1.4000 again after Friday's surge above $1.4100 and this was seen as a caution by some that more long euro/short dollar positions could unwind, with the euro's Oct. 12 low of $1.3775 seen as a possible target. The euro was flat at $1.3933, well below Friday's eight-month high. Initial support is expected at $1.3825, with resistance up at $1.40 and a move above $1.4050 needed to restart its rally.

Australian dollar

The Australian dollar fell 0.3 percent to $0.9867, correcting further after charging to parity with the U.S. dollar on Friday. It initially firmed after the Reserve Bank of Australia's minutes from its on Oct. 5 meeting said the arguments to hold or hike rates were finely balanced, but later gave up the gains. The RBA, which has been raising rates when the likes of the U.S. and other developed economies have been looking to ease, judged it had the flexibility to keep rates unchanged in October as a rising local dollar tightened monetary conditions, while domestic credit growth remained weak and global growth uncertain.

Indian rupee

The Indian rupee on Monday snapped a three-day winning streak as the dollar's gains versus major units overseas weighed, but hopes for capital inflows stayed firm with the launch of the country's largest-ever share sale. The partially convertible rupee closed at 44.36/37 per dollar, 0.6 percent below 44.10/11 at close on Friday, when the rupee rose as high as 43.95, its highest since Aug. 29, 2008. The rupee traded in a band of 44.1800-44.4150 during the day. On Friday, the Reserve Bank of India governor Duvvuri Subbarao said the central bank will intervene in the forex market if inflows turn lumpy.

Gold

Gold traded firm on Tuesday, and gains were capped by a stronger dollar, but anticipation of further monetary easing by the U.S. central bank is likely to keep sentiment bubbling over. U.S. industrial output shrank last month for the first time in more than a year, a sign the economy was in a slow-growth rut that appears certain to lead to more stimulus from the central bank. Charts show that gold could rise to $1,386.75, as the retracement is seen to have ended at $1,352.55, a low touched on Monday.

Source: Richcomm Global Services, DMCC, Dubai