The dollar had traders’ pulses racing Friday with a tumble to a fresh month-low early in the trading day. And yet, the attempt at forcing a week-end breakout would be quickly snuffed out by a risk aversion swell that would keep the greenback on the same general track that risk appetite itself has trudged through most of this past week: congestion. Taking stock of the false breakout, we first note that the trade-weighted dollar index had briefly dipped below 81 through the Asian trading hours to plunge lows not seen since August 11th before abruptly reversing tack when European liquidity filled out. On the other hand, the push didn’t seem nearly as tense across the majors. Instead of trying to catalyze a breakout from congestion, EURUSD would instead curb a steady rally with the first negative close in six days. GBPUSD would put in for a similar abrupt reversal after decelerating series of gains through the week. From there, USDJPY carved out its smallest range in weeks and held just off the high reached post BoJ intervention; while USDCHF actually slid 60 points as the market tried to work out its link to sentiment trends. In the end, it was AUDUSD that most closely mirrored the Dollar Index with a surge above 0.94 before quickly retreating back to the psychological level.

The take away from this mix is that the individual dollar-based pairs are following different paths while the currency itself seems to actually be anchored to congestion. This fits into the scenario where the greenback is still playing the role of the FX safe haven; but a lack of a meaningful trend in investor sentiment itself has allowed ancillary fundamental drivers to encourage temporary breaks in correlation across the different dollar-based pairs and asset classes. Temporarily unifying the markets today, the speculative ranks were distracted by a round of financial headlines that distinctly raised financial risks going forward. At the very beginning of the new trading day, the focus was on the Chinese central bank’s (PBoC) financial stability report. The semi-annual report assessed a growing risk of an asset bubble and inflation that feeds many investors’ concerns that the next catalyst for a global meltdown could come from the same economy that is still considered one of the best performers in the world. It wasn’t until the European headlines started to publish that fear really started rolling. Articles that touted an imminent bailout for Ireland followed by a quick rescue for Portugal fed traders hungry for activity on an otherwise quiet day. The only trouble was that these stories wouldn’t recount any fresh news, merely fresh speculation. The implications of today’s scheduled event risk would run a little deeper. The 1.1 percent pace of annual growth in consumer prices merely cements expectations for the Fed to hold rates for the foreseeable future. On the other hand, the one-year low in the University of Michigan consumer sentiment survey weighs risk appetite and thereby bolstered the value of safe haven assets including the dollar (even if the data is based in the US, the big-ticket data from the world’s largest economy can alter the mood of market participants across the globe). An 18 month low in the expectations figure gives us the trouble ahead.

Ultimately, we find the dollar has ended the week mired in fundamental congestion even if the opening move was for a bearish technical breakout. Looking ahead to next week, it is important to keep a constant vigilance for meaningful changes in the winds of sentiment. At the same time, we may see the greenback definitively unseated from its risk role should the Fed decided to significantly expand its stimulus effort.

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