The dollar index posted a fresh 1-1/4 year high and remains well supported due to the European sovereign debt crisis. The EURUSD slumped to a 1-1/3 year low and USDJPY continues to move sideways moderately above its all-time high of 75.35 per dollar. Bullish factors include (1) comments from the head of sovereign ratings at Fitch Ratings who said the ECB should boost bond purchases to support Italy and prevent a "cataclysmic" collapse of the euro along with the statement from the Fitch that Italy faces a “significant chance” of a downgrade later this month, (2) the larger-than-expected declines in Nov German and Spanish industrial production, which signals a slowdown in the Euro-Zone economy, (3) comments from ECB Council member Nowotny who said he sees the risk of a “velvet recession” with GDP growth in the Euro-Zone at zero this year, and (4) the action by Portugal to reduce its 2012 Portuguese GDP estimate to –3.1% contraction annualized, weaker than an Oct estimate of –2.2% annualized, which may make it harder to refinance its debt and worsen the European debt crisis. Bearish factors include (1) optimistic comments from ECB President Draghi who said he sees “tentative signs of stabilization of economic activity at low levels” and (2) short covering in the euro after CFTC data showed that futures traders increased their short positions against the euro to a record 138,909 contracts in the week ended Jan 3.
