The dollar index pushed up to a 3-week high on the delay of a bailout package for Greece.  EURUSD slipped to a 3-week low on Greek worries.  USDJPY slumped to a 3-1/2 month low after the BOJ unexpectedly expanded its asset-purchase program.  Bullish factors include (1) increased risks of a Greek default which boosted the safe-haven demand of the dollar after a bailout was postponed until Feb 20 at the earliest and could be put off until after the Greek elections in Apr, (2) concern over contagion of the European sovereign debt crisis after  Moody’s Investors Service downgraded the debt ratings of 6 European countries and kept a negative outlook on them, (3) the warning from Fitch Ratings that Greece must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default that could cause panic in its banking system and capital flight in nations including Portugal and Ireland, and (4) the plunge in the yen after the BOJ unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and said it will target 1% inflation “for the time being.”  Bearish factors include (1) China’s pledge to invest in Europe's bailout funds and sustain its holdings of euro assets, which is euro-supportive, (2) the smaller-than-expected increase in he Dec net long-term TIC flows, which indicates reduced foreign demand for U.S. dollar assets, and (3) the wider-than-expected Dec U.S. trade deficit. 

Fundamental Outlook—Short-Term Neutral—The dollar index rebounded on increased safe-haven demand as European sovereign-debt headlines continue to provide near-term price direction.  The dollar will likely see some weakness if there is a final Greek deal, but the dollar has underlying support from the stronger U.S. economy and stock market. 

 

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