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The dollar index slumped to near fresh 2011 lows yesterday after moving through the rising trend line support off 2010 lows that we discussed yesterday. As was expected after moving through this support level the index continued to decline to test the 2011 lows at 76.85, while the index so far hasn't posted a new 2011 low we believe that it is probably only a matter of time. While it is possible that the index could bounce off the support at these levels and move higher we favour a test of 2010 lows at 75.60 before we reverse higher.

This comes largely in lieu of the ongoing speculation that the ECB will have to toughen its language to pave the way for rate hikes in an attempt to tackle inflation in the euro-area. As such, players are bidding up the euro against almost all other currencies in anticipation of this shift from the ECB. As long as these trends dominate trade the index will remain under pressure and move lower. A possible ray of light for the index could be falling US equities, markets have been climbing steadily for a few months and a pull-back looks overdue, if we see a significant decline in US equity prices in coming days and weeks the buck should catch some fresh bids.

Written by Jonathan Granby, DailyFX Research Team