Currency outlook: Dollar index recovers

The dollar index recovered last week after having beaten down badly since the beginning of August. The index touched a low of 100.51 initially and then bounced back well, recovering all the loss.

Data released on Friday showed that the US Personal Consumption Expenditure (PCE), the Federal Reserve’s inflation gauge inched up in August. The US PCE came in at 2.5 per cent (year-on-year) for the month of August. This was up from 2.47 per cent seen in July. The US PCE number aided the 10Yr Treasury yield to rise well on Friday.

Dollar outlook

The dollar index (101.70) has an immediate resistance at 101.75. If the current momentum sustains, then a break above 101.75 can take the index up to 102.50-102.7 this week. But if the index turns down from here, then it can fall back to 100.50 again. That in turn will keep alive the danger of seeing 100-99.50 on the downside, going forward.

Yields stable

The US 10Yr Yield (3.9 per cent) has been stuck between 3.75 per cent and 3.95 per cent. The broader view remains bearish. We can expect the 10Yr yield to break 3.75 per cent and fall to 3.5 per cent in the coming weeks. This fall may not happen immediately, and can gradually. Also, before this fall, the current sideways move can continue for some more time.

In case the yield breaks above 3.95 per cent, a short-lived rise to 4-4.05 per cent can be seen. A rise beyond 4.05 per cent is unlikely. As long as the yield remains below 4.05 per cent, the overall downtrend will remain intact.

Corrective fall

The euro (EURUSD: 1.1048) fell over a per cent last week. The currency touched a high of 1.1202 and then declined sharply, breaking below the intermediate support level of 1.11. Immediate support is at 1.10, which can be tested this week. A bounce from 1.10 can take the euro up to 1.11 again. But a break below 1.10 can drag it down to 1.0930-1.09. The price action around 1.10 will need a close watch this week.

Range bound

The Indian rupee (USDINR: 83.87) continues to remain stuck between 83.75 and 84. Within his range, the domestic currency is moving up towards 83.75 – the upper end. We can expect this sideways range to remain intact. The chances are high for the rupee to reverse lower anywhere from the 83.80-83.75 region. That in turn can take it down to 83.90-83.95 again.

If the rupee manages to breach 83.75, it can rise to 83.60. But from the big picture perspective, the bias is negative. So, we see a high chance for the rupee to break 84 and fall towards 84.50 in the coming weeks.