EUR/USD surged over 70 pips to the 1.1174 area on Friday, registering its best single day performance since early August. Fuelled by broadly positive sentiment on trade and a global economic recovery, EUR/USD extended its rally on Monday and touched 1.1183, a key resistance level.
The positive market sentiment led to lesser demand for the greenback. The European Central Bank's latest bulletin pointed to a moderate recovery in the region's manufacturing output growth, which also boosted the euro.
Meanwhile, China's industrial production growth registered an upswing of 6.2% in November, higher than October's reading of 4.7%. This is also the fastest year-on-year growth in five months, adding optimism that the global cyclical downturn is close to an end.
The US dollar index plunged to 96.65 area as a result of strengthening in the euro, aussie, kiwi and other riskier currencies. From an equity perspective, a weakening dollar suggests 'risk on' and this is widely regarded as a positive signal for emerging markets.
A weaker dollar will benefit commodities too as crude oil prices continue to rise in December; reaching their highest level since mid-September. In addition, a much larger-than-expected decline in US commercial crude inventory last week fuelled a rally in oil prices. According to the report by the Department of Energy (DoE), US commercial crude stockpiles fell 5.47 million barrels last week, far greater than forecast of a 1.4 million drop.
The plunge in USD also boosted the gold price, which looks to have ended its three-month consolidation. Technically, the gold price has broken out above its SuperTrend (10,2) and entered into a bullish trend. Fundamentally, however, there seems to be a lack of positive catalysts for gold’s rally to sustain.
In Asia, Hang Seng Index has probably broken out above a key level of 28,000 and thus opened upside towards the next key resistance at 28,640 and then 29,300 points. Recent strength in the Hong Kong dollar against the US dollar suggests that capital has flown back to HKD-denominated assets, perhaps for bargain hunting. However, the relative strength index (RSI) momentum indicator suggests that the index has temporarily been overbought.