Washington Fiscal Crisis Could Unleash Dollar Selling, Gold Buying

(September 27, 2013 - by Kira Brecht, Kitco.com)

The U.S. dollar is under pressure, but the current bout of minor weakness could be just the "calm before the storm." With political squabbling in Washington D.C. stealing headlines, the greenback is slumping as the nation hurtles toward a potential government shutdown on Oct. 1.

Any government shutdown, if it does occur, will likely be short-lived. A much larger black cloud is looming on the horizon for the U.S. dollar in the form of the more significant debt ceiling crisis, which is expected to trigger around Oct. 17.

The Federal Reserve’s hesitancy to begin tapering deflated interest rates in recent weeks and lower rates are dollar-bearish. A weaker dollar is gold-bullish. Look for more of this behavior in the days and weeks ahead.

Technically, the U.S. dollar index looks heavy. The market is testing support at 80.60, the Sept. 18 swing low. The moving average outlook is bearish, as the U.S. dollar index is trading below all significant moving averages from the 20-day to the 200-day. That positioning will keep trend-following traders bearish on the greenback.

After the Fed’s decision to hold off on tapering for now, emerging market currencies are picking up some steam, and the dollar will remain under pressure amid a weaker interest rate differential perspective.

For now, the bearish case is stacking up for the dollar—little chance of higher official rates on the horizon in the U.S. anytime soon, government stalemate on key fiscal and budgetary issues, and a lack of a safe-haven bid. Geopolitical concerns over a Middle East outbreak have calmed in recent days as the United Nations attempts to work out a diplomatic solution with Syria. And, the European Union’s debt crisis has been fairly calm of late. Bottom line? There’s not a lot of safe-haven flows into the dollar. Money managers are beginning to tiptoe back into some emerging market currencies as they reach for yield.

The dollar is holding the 80.60 support zone for now. But, it could be just be the "calm before the storm." If that area gives way near term, look for a massive new wave of dollar selling to emerge, with the next major technical target on the downside at the February 2013 low at 78.91.