For the past week or so, the US dollar has rallied strongly against its major peers thanks to the drama in Ireland and in the Korean peninsula. Ireland needed about €85 billion ($114 billion) to help service its ballooning deficit and to provide some liquidity in its commercial banks. With the Irish economy contracting for the last three years, and its debt seen to exceed 120% of its total output, Ireland’s long term credit score was downgraded. Last week, Ireland’s credit rating was downgraded by the international ratings agency, Standard & Poor’s, to A from AA-. This, of course, was coming at the heel of Greece which in 2009 caused a ruckus in the financial market because of its deteriorating fiscal condition.
In the Eastern part of the globe, the growing tension between North and South Korea also caused panic among investors which in turn benefited the like of the US dollar because of its “safe” nature. In a surprising turn of events, North Korea fired its artillery towards a populated territory in South Korea which killed at least 4 people and injured dozens. South Korea, of course had to respond by firing towards the North as well. At least for now, though, the firing between the two Koreas has come to a standstill. Still, with news that the North is operating “thousands of uranium centrifuges,” the threat of war remains.
In my opinion, the worse case scenario in the two regions, eurozone and Korea, may already have been “priced in” by the market. Greece and Ireland’s fiscal situation have already spread beyond their borders by causing the spreads in the other countries’ sovereign bonds to widen. It’s no secret that other countries like Spain and Portugal are having difficulty servicing their spending and debt as well. The only difference now is that they will have to pay a larger cost if they needed to borrow more funds.In Korea, while a war is still a possibility it is still quite unlikely given today’s international diplomatic processes. Nevertheless, a war could indeed sink the international market and propel the USD upward.
Technically, the US dollar index has retraced back to the neckline of the previous head and shoulders formation after touching a low of 75.631 in the first week of November. Interestingly, the neckline also falls in line with the 61.8% Fibonacci retracement level of the most recent down wave. With an overbought condition, as indicated in the stochastics, and the last daily candle forming a bearish doji, it is quite likely that the USDX dip again. If it does, it could fall back to 76.00 once more. But if risk aversion persists and the index manages to break above the neckline, it could the reach 83.00.