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Weakening US yields create headwinds for the greenback

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Weakening US yields create headwinds for the greenback

The dollar swooned on Monday morning on the heels of news that Lawrence Summers had announced on Sunday that he would remove his name from consideration for the next Chairman of the Federal Reserve.  Summers had been considered the front runner with Vice Chairman Janet Yellen as close second, but Summers is considered more of a hawk than Yellen and his withdrawal has led to a risk on rally.

There were a number of member of congress that had strong opposition to Summers, as he is known as a political figure that can be contentious without a calm demeanor that is required for a Fed Chairman. The withdrawal was a surprised to traders and investors driving US yields lower by more than 10 basis points in the 10-year space. Vice Chair Janet Yellen would appear to become the front runner, but other potential candidates seem to be in play as well, including former Fed vice chairman Donald Kohn.

Capital flows should continue to be driven by the Federal Reserve’s decision this week to alter their bond purchase program.  The Fed is scheduled to have a two day meeting which begins on September 17, in which most traders believe the FOMC will reduce its bond purchases by approximately 10-20 billion dollars per month.

The Euro gain ground on Monday as the dollar dropped as US yields declined.  Resistance is seen near the recent August highs of 1.3450, while support is seen near 1.3325.  Momentum is gaining strength with the MACD (moving average convergence divergence) index generating a buy signal where the spread (the 12-day moving average – minus the 26-day moving average) crossed above the 9-day moving average of the spread.  The index has moved from negative to positive territory confirming the buy signal.  The RSI is printing near 58, which is on the upper end of the neutral range.

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