Currency Outlook: Dollar Gains Momentum

The upmove in the dollar index has gathered strength last week. The index surged over 2 per cent breaking above the key resistance level of 101. It has closed the week at 102.52, up 2.13 per cent for the week. The greenback gained as the sentiment turned risk-averse on the back of the escalating tensions in the Middle East.

Strong jobs data release on Friday added more strength to the dollar rally. The US added 254,000 jobs to its nonfarm payroll in September. Market expectation was to see an addition of 150,000 jobs. The unemployment rate fell to 4.1 per cent in September from 4.2 per cent a month ago. This data release has dashed the hopes of the market for another 50 basis points (bps) rate cut in November. That in turn took the US Treasury yields and the dollar index higher on Friday.

Dollar outlook

The strong rise above 101 is very significant. The dollar index (102.52) will now have support in the 101.80-101.50 region. The dollar index can rise to 103.50-104 in the coming weeks.

From a big picture, the recent rise from around 100 is very significant. That keeps the broader sideways range intact. As such, the dollar index may now have the potential to rally towards 105-106 – the upper end of the range, in the coming months.

The index will now have to fall below 101.50 in order to turn the outlook negative again.

Resistance ahead

The US 10Yr Treasury yield (3.96 per cent) has surged breaking above the resistance at 3.83 per cent last week. Immediate resistance is at 4.05 per cent. Above that 4.15 per cent will be the next important resistance to watch. A rise to test these resistances in a week or two cannot be ruled out.

The price action around 4.15 per cent will need a close watch. A turnaround from 4.15 per cent can take the yield down to 4 per cent and lower again.

Room to fall

The euro (EURUSD: 1.0974) has declined breaking the 1.10-1.12 range on the downside. That leaves the immediate outlook bearish. Resistance will now be in the 1.10-1.1030 region.

The euro can test 1.09-1.0880 this week. A break below 1.0880 will see the fall extending to 1.08.

Rupee weakens

The Indian rupee (USDINR: 83.97) has declined breaking below 83.80 last week. Key supports are at 84 and 84.10 which can be tested this week. Whether the rupee manages to recover from the 84-84.10 region or not will determine the next move.

A reversal from the 84-84.10 support zone, can see the rupee recovering towards 83.80-83.70 again. But a break below 84.10 will be very bearish. That will bring the rupee under renewed pressure for a fall to 84.40 and lower.

Infobox: Rupee watch

Rupee has a crucial support at 84-84.10 which has to hold to avoid more weakness.