Underlying dollar confidence will remain weak with continuing expectations of a medium-term move away from the dollar by global institutions. There will also be further expectations that the dollar will be used as a global funding currency. The longer-term interest rate structure is more supportive which should provide some protection. The dollar will still find it difficult to gain more than limited short-term relief unless there are much more aggressive moves to underpin the US currency. Without official support, markets are likely to attack the 1.50 level before a sharp dollar correction stronger.
The Euro recovered quickly from the German ZEW index and pushed to challenge new 2009 highs later in the session with a peak near 1.4880. Underlying risk appetite remained firm which diminished any defensive demand for the US currency while underlying sentiment towards the dollar remained weak amid continuing expectations of medium-term reserve diversification.
Fed Governor Kohn was generally cautious over the economy on Tuesday. Comments from US Federal Reserve and administration officials will remain under close scrutiny, especially as dollar weakness is becoming a more important market focus. So far, there have been no significant comments of support and confidence in the US currency will remain weak if stronger backing for the currency does not emerge. Euro-zone rhetoric will also be under close scrutiny to see if protests increase.
Despite a brief recovery back to 1.48, the dollar remained on the defensive on Wednesday with a slide towards the 1.49 area.