US Dollar Falls As Citigroup Rescue Boosts Risk Appetite

The US Dollar fell against major currencies in overnight trading as rumors of a US government rescue of ailing banking giant Citigroup Inc boosted risk appetite and pushed stock markets higher. The economic calendar is noticeably tame in European hours with cross-market forces likely to retain dominance over forex price action.

The Euro gained in overnight trading, adding 1.3% against the US Dollar to push above the 1.29 level. The British Pound followed suit, gaining as much as 1.5% on the greenback to test above 1.4550.

Forex price action largely ignored an uneventful economic calendar to fall in with risk trends in overnight trading. Traders greeted rumors that the US government would up its stake in Citigroup Inc, staving a high-profile bank failure. The Wall Street Journal reported that Citi has proposed that the government convert a large portion of its preferred shares into common stock, thereby raising its interest in the firm without costing taxpayers any more money. The MSCI Asia Pacific Stock Index gained 0.6% and US equity index futures added an average of 1.2%; meanwhile, the US Dollar slipped an average of -0.9% against major currencies.

The economic calendar remains noticeably tame in European hours with risk sentiment likely to retain dominance over directional momentum. Markets remain buoyant for the moment, suggesting the US Dollar may remain under pressure. Importantly, the aforementioned Citigroup deal would transfer as much as 40% of ownership in one of the world’s largest financial institutions into the hands of the US government. The markets are clearly averse to nationalization: stocks sold off sharply last Friday after US Senator Christopher Dodd, Chairman of the Banking Committee, said that it may be necessary for policymakers to take over some banks for “a short time.” Although US President Obama’s press secretary Robert Gibbs calmed investors with a quickly issued statement saying that “this administration continues to strongly believe that a privately held banking system is the correct way to go”, the initial positive reaction to the Citi scheme may quickly reverse course as the magnitude of the action and its details are digested by the market.

Technically, the US Dollar rallied to critical resistance last week, boosted by the negative reaction to initial US policy efforts and an ominous G7 summit. The Dollar Index, an average of the greenback’s value against six top currencies, has now fallen back to challenge key support above 86.40, the intersection of a pivot level that has frequently acted as near-term support/resistance and a rising trend line from December’s lows. If last week’s downswing was corrective, this looks to be a plausible bottom before the bulls regain momentum. Alternatively, a daily close below 86.40 would make the possibility of a sustained bearish turn more convincing.