FOREX: Dollar Rallies Still Unconvincing as S&P 500 Jumps, US Rates Continue Slide

• Dollar Rallies Still Unconvincing as S&P 500 Jumps, US Rates Continue Slide
• Euro Traders Overlook July ECB Rate Hike Potential, Worry about Subsequent Moves
• Canadian Dollar Awaits a Potential Volatility Jolt from Employment Data
• British Pound Active Despite Mum BoE, Another Round of Data Ahead
• New Zealand Dollar Retraces after RBNZ Governor Says Market ‘Slightly Overreacted'
• Swiss Franc Starting to Retrace as Euro Connection, SNB Outlook Cool
• Gold Trading in an Ever-Smaller Range as Volume, Volatility Cool

Dollar Rallies Still Unconvincing as S&P 500 Jumps, US Rates Continue Slide

Through the economic docket filled out this past trading day for the US dollar, the influence of the collective event risk was still too light to jumpstart a genuine trend. Market activity for the dollar, currencies and broader financial markets is still too thin to instigate lasting runs. This is a reality that some traders are acclimating to and subsequently lowering their requirements for calling a significant move for the greenback. When it happens, an authentic trend for the benchmark currency will develop alongside meaningful drives in other asset classes; and it will certainly be backed by a tangible fundamental catalyst (even if that spark happens to be a pure shift in collective sentiment). Therefore, we should view the dollar's second consecutive advance through Thursday's close with caution. The Dow Jones FXCM Dollar Index advanced 0.2 percent from the previous session's close - clearing this week's range high at approximately 9,510. Looking at the currency's performance against specific counterparts, we note that the greenback lost ground against commodity bloc (the Canadian, New Zealand dollars) but advanced against fellow safe havens (Swiss franc, Japanese yen), the Euro and pound.

Typically, when the dollar is higher through the trading day, it is based on a general slide in risk appetite. However, this time around, the first advance from the S&P 500 in seven trading days (following the longest series of consecutive losses in many months) would help the export / high-yield currencies; while the more appropriate safe haven (Swissie) and funding currency (yen) gave up ground to the dollar. As for the principle European currencies, event risk would turn the tables. We note this mix in performance; because if it continues, the greenback's advance will quickly stall. The greatest potential for a bullish run remains a slump in risk appetite or a recovery in US rates. Yet, in addition to the jump in equities carrying over to the Asian session; we note short-term US Libor rates were unchanged and the US 2-year Treasury yield has yet to break its steady, two-month tumble.

For Friday's session, we will keep an eye on the underlying ‘themes'; but the probability of a major shift through the closing 12 hours of the week is much lower than it was in the preceding sessions. The economic docket brings both the monthly budget report for May (important given the warnings of a possible credit watch change on US sovereign debt recently) and imported inflation levels for the same month. Neither is more influential than the April trade balance (a smaller-than-expected $43.7 billion deficit). The risk of a major trend developing today is low.

Related:Discuss the Dollar in the DailyFX Forum, John's Picks: EURUSD and EURCAD Reversals Run at Two Different Speeds

Euro Traders Overlook July ECB Rate Hike Potential, Worry about Subsequent Moves

That wasn't a straightforward reaction to the ECB's rate decision. Heading into the central bank's closely-watched policy meeting; market participants had already written off any chance for a change in the benchmark lending rate at the July gathering. Instead, the focus would be on the statement and President Jean Claude Trichet's commentary for guidance on the authority's pace. The more contentious “strong vigilance” phrase (considered central-bank speak for a hike at the next meeting) was present; but that too seems to have been fully priced in. Looking beyond the July decision, the market dubiously latched on to the outlook for inflation to drop below the central bank's target in 2012 (policy is made on the medium-term outlook). Furthermore, concern for the region's financial health flared up again. Reports quoted unnamed officials who projected Greece needs 170 billion euros in additional aid from 2012 to 2014 while Moody's said a Greece could hit Ireland and Portugal.

Canadian Dollar Awaits a Potential Volatility Jolt from Employment Data

The Canadian dollar advanced against all its major counterparts aside from the kiwi dollar Thursday. This broad performance developed despite a round of lackluster data. The New Housing Price Index for April printed a modest 0.3 percent advance while the trade balance for the same month unexpectedly reverted to a C$0.9 billion deficit. Through the final trading session of the week, the event risk moves up a notch in terms of influence. May payrolls are expected to have grown by 20,000; but deviations from consensus have been quite dramatic as of late.

British Pound Active Despite Mum BoE, Another Round of Data Ahead

As expected, the MPC would give the market nothing to work with to speculative on the timing for its shift from a neutral monetary policy stance. The hold on rates and the bond program kept the central bank from delivering any commentary on its reasoning. With member Sentance now gone, the market is taking a notably more dovish outlook. In the upcoming session, we may have more to work with in factory output and prices.

New Zealand Dollar Retraces after RBNZ Governor Says Market ‘Slightly Overreacted'

There is little doubt that RBNZ Governor Bollard knew his remarks for a gradual increase in rates over the coming two years against the backdrop of easing risks from the earthquake fall out would encourage the kiwi higher. Yet, the policymaker still made the effort to talk the currency back from its rally to fresh record highs against the greenback by saying the market “slightly overreacted” to the event and commentary.

Swiss Franc Starting to Retrace as Euro Connection, SNB Outlook Cool

With risk appetite firming up through Thursday's session, it comes as little surprise that USDCHF would advance – the franc has stood as the better safe haven for some time. Yet, it is somewhat remarkable that the euro and Japanese yen would also manage a positive close against the currency. The market may be recognizing the difficulty in maintaining the Swissie's highs with an anemic rate outlook and connection to the EU.

Gold Trading in an Ever-Smaller Range as Volume, Volatility Cool

The trading range on gold continues to contract on a near-daily basis. This reduced activity level is also showing through in futures volume and volatility readings. A lack of conviction while the metal is still heading higher is a disconnect that raises the risk of a major reversal. The most threatening, potential catalyst for a reversal remains the health of the commodity's primary alternative – the US dollar.

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Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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