Currency Outlook: Dollar rally continues

The dollar index continued its rise for the third consecutive week. The rise to 104 almost happened last week in line with our expectation. The index touched a high of 103.87, and has come down from there to close the week at 103.49.

Dollar outlook

The overall bullish view is intact. The dollar index (103.49) has some resistance at 104 which can be tested this week. We expect this resistance to hold on its first test.

 A corrective fall from around 104 to 103-102.70 is a possibility. A fresh leg of up-move thereafter will have the potential to breach 104. That in turn will open the doors for the dollar index to see a fresh rise to 105-105.50 in the coming weeks.

Finds support

The US 10Yr Treasury yield (4.08 per cent) is getting support around 4 per cent. The yield fell in the first half of the week and made a low of 3.99 per cent. But from there it rose back well in the second half recovering all the loss.

Immediate resistance is at 4.12 per cent. A break above it can take the US 10Yr Treasury yield up to 4.17 and 4.21 per cent this week. The price action thereafter will need a close watch to see if the rise is extending beyond 4.21 per cent or not.

The outlook will turn negative only if the yield declines below 4 per cent. Only then the chances of a fall to 3.85-3.8 per cent will come into the picture again.

More downside

The euro (EURUSD: 1.0867) continues to fall. It touched a low of 1.0811 and has bounced back from there. The broader trend is down. Resistances are at 1.0885 and then 1.0920-1.0930 which can cap the upside if more rise is seen from current levels.

The outlook is bearish to break 1.08 in the coming days. Such a break can take the euro down to 1.0750 in the short term.

The level of 1.0750 is a strong support which can halt the current fall. A bounce from there can trigger a corrective rise to 1.09-1.0950 going forward.

Fresh fall

The Indian rupee (USDINR: 84.07) was broadly stable all through last week. The domestic currency was stuck in a narrow 10-paise range of 83.98-84.08 through the week. The break above 84 seen on Wednesday failed to get a strong follow-through rise. There are chances for the rupee to remain stuck between 84 and 84.10 for some more time.

However, the bias is negative. We expect the rupee to break 84.10 eventually and decline towards 84.40 going forward.

Rupee has to get a sustained rise above 84 in order to see a recovery towards 83.85-83.80.

On the charts, the medium-term picture is negative for the rupee. It is likely to remain below 83.50 going forward. Once the break below 84.10 happens, it will open the doors for the rupee to weaken towards 84.80-85 over the medium-term.