Everyone knows that when there is risk in teh marketplace, teh US dollar (USD) is the place to be. No other currency enjoys the safe haven properties that the world’s reserve currency does as the liquidity and safety of the US market is unparalleled despite the economic and political problems we have.
So what typically occurs is that Dollar declines go hand in hand with stock market gains and this is what we have been seeing over the last month. However, risk has been re-introduced in the market thanks to Greece and this referendum and no-confidence vote that is supposed to take place on Friday.
The markets are hopeful that Bernanke might save the day today at the FOMC meeting but I have my doubts as the most recent policy change dubbed “Operation Twist” hasn’t had time to play out. So my gut feelingis that the market will be disappointed by the FOMC today and will immediately look upon the risk in europe as the number one issue.
As you can see on the chart below of the FXCM US Dollar index (a weighted basket), the recent trend for USD has been lower but the greenback was able to break through the 38.2% retracement level and is now sitting just above it. If this level acts as support and the stochastics reach that oversold level below 20, then USD could be a buy which would likely send risk assets lower.
Could the Greek no confidence vote be the catalyst for further risk aversion and USD buying?
Stay tuned!