U.S. Dollar Losing Appeal as Safe-Haven Asset

The U.S. Dollar weakened on Tuesday underpinning most major foreign currencies and commodities. Investors pressured the Greenback on rising expectations that a compromise would be reached between U.S. policymakers to avoid the so-called “fiscal cliff” which threatens to sidetrack the economy. Speculators also boosted appetite for risk, which drove down the dollar’s appeal as a safe-haven asset. 

The new proposal by the White House that is driving today’s optimistic view calls for the President to drop his demand for a rise in tax rates on households earning more than $250,000 a year, instead calling for tax rates to expire for households earning more than $400,000 annually. Republicans compromised by dropping their opposition to higher tax rates on households earning more than $1 million. 

Traders are watching for further progress and will adjust positions accordingly. If conditions don’t continue to improve, suggesting a deal will be reached by the end-of-the-year, the major currencies will become vulnerable to profit-taking ahead of next week’s Christmas holiday. Although there seems to be a slight upside bias in the EUR/USD and GBP/USD today, the trading action is expected to be dictated by news headlines, making them susceptible to above average volatility. 

The weaker dollar is also helping to support February gold and crude oil. Gold remains the more vulnerable of the two as it nears the last main bottom at $1684.10. A move through this level will reaffirm the downtrend on the daily chart. Gold appears to have lost its appeal as an investment with investors favorable the more liquid equity markets at this time. This sentiment could shift if weakness develops in the stock markets and money flows back to gold. 

February crude oil is still rangebound, but a new main bottom has formed at $85.76. The latest range of $90.90 to $85.76 makes $88.33 a new pivot price. A trade through this price today will put an upward bias spin on the market but will not change the trend to up. Fundamentally, the current short-term rally reflects greater optimism that a deal will be reached regarding the fiscal cliff and that the U.S. economy will avoid a recession in 2013 which threatens crude oil demand.