The dollar will again lose defensive support when risk appetite is firmer and overall confidence in the US currency is also generally weak with particular fears over the medium-term risk profile for the US currency. Confidence surrounding the Euro-zone has also stabilised, although sentiment could still falter very quickly. Markets will be looking to trigger a major currency move and will, therefore, also be targeting a weaker US currency in the near term in an attempt to break resistance levels. The dollar could weaken slightly further, but resistance is liable to remain tough to break with the dollar finding firm support near 1.4450.
The Euro retained a firm tone on Monday, challenging technical resistance levels above the 1.4350 region against the dollar, but it was still struggling to make strong headway. Liquidity levels were undermined by the US Labour-Day holiday and ranges dwindled to very low levels.
Risk appetite was also generally firmer as markets were still looking to put a positive gloss on Friday's US payroll data. There were also some cautiously optimistic comments on the global economy from ECB President Trichet which helped maintain a more positive Euro approach.
Underlying dollar sentiment was also still generally fragile with reduced defensive demand for the currency and a lack of confidence in medium-term fundamentals, although it was still difficult for the Euro to take full advantage. Markets will watch comments from Federal Reserve officials to assess the potential for a move away from the ultra-loose monetary policy. The Euro was trading just below the 1.4350 level in early Europe on Tuesday before pushing to highs above 1.44 as gold strengthened to above the US$1000 level.