The US dollar has been under serious attack since the beginning of the month reaching its lowest level since the beginning of the year, just above 1.4600 against the euro and currently flirting with the important level of 90 against the Japanese yen. Many reasons are behind this downside which amplified last week.

First and foremost the appetite for risk cautiously picked up after the G20 financial ministers met in London on September 4. The ministers then restated their unyielding commitment to aid a sustainable global economic recovery. This message together with the return of investors from summer holiday have boosted the demand for risky assets thus allowing gold prices to move to new multi-month highs and broad array of commodities to rally and as a result added to the downside pressure on the Dollar.

Technically, the weakness of the dollar was partly led by euro/US dollar breaking above what was viewed as key resistance levels 1.4450/1.4550 and making headway towards the next resistance of 1.4650.

Another important factor for the dollar decline was the Japanese elections of August 23. The market had been expecting large selling of the dollar in favor of the yen since that date and this movement finally materialised last week. In our opinion, however, it is important to note that the Japanese government might intervene around the 85 level if the fall of the dollar is seen as too rapid.

Finally, a report from the United Nations had a very negative impact on the dollar. The last report from the United Nations Conference on Trade and Development underlines the necessity to revisit the role of the dollar as the world currency reserve. It is important to note that this report follows many similar declarations from Russia and China over the past few months that were pushing for their respective currencies to become the world reserve.

UNCTAD is the first international body to call for the dollar to lose its international power. The report is suggesting agreements similar to the Bretton Woods. Detlef Krotte, co-writer of the report emphasised that it would be a good idea to replace the dollar by an artificial currency which would help solve an important array of problems related to the issues of the world commercial exchanges and the public debts.

Given last week's developments the weeks to come will certainly be of great interest. A large majority of traders are of the opinion that the dollar fall is only starting and that historic lows could be tested again early next year. In our opinion the dollar sell off will not continue to materialise in the short run. The latest comments from President Barack Obama, who largely accepted a recommendation from the US International Trade Commission to impose additional duties on Chinese-manufactured tires following a "surge" in imports will certainly have significant negative implications for US relations with China and may precipitate a flurry of bilateral trade disputes which could impact on a wide range of sectors. The market seems to react to this potential surge of protectionism.

Carry trades are being sold led by a fall in euro against the yen which triggered stops on the downside in the euro/US dollar currency pair. Even if the trend seems to be clear for the dollar, we have difficulties finding a currency worthwhile buying against the greenback in these difficult market conditions. The yen might be the exception in the medium term but as previously mentioned it is our opinion that the BOJ will step in to halt its currency from appreciating too quickly.

As far as the euro is concerned many European policy makers are already complaining about the negative impact of a strong euro which would greatly penalise its recovery from the current economic crises. The story is the same in Switzerland where the Swiss National Bank refuses to see any appreciation in its currency. In England, where the government is increasingly worried that public deficits will provoke a rise in taxes and a slowdown of public spending, the rise of the pound is also not welcomed.

Upcoming FX key events

This month of September will give us some indication on where different interest rates will be heading. The Swiss SNB meets today and the BoE MPC meeting minutes will be released on Wednesday, the day the US FED FOMC Interest Rate Decision will take place.

Finally, Mr Obama will host the next Group of 20 economic summit in Pittsburgh on September 24-25.

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FX technical keypoints

EUR/USD is bullish, target 1.4720, key reversal point 1.4250

USD/JPY is bearish, target 87.10, key reversal point 94.50

GBP/USD is bullish, target 1.7000, key reversal point 1.6250

USD/CHF is bearish, target 1.0300, key reversal point 1.0600

AUD/USD is bullish, target 0.9000, key reversal point 0.8400

NZD/USD is bullish, target 0.7200, key reversal point 0.6800

Mr Longchamp is head of trading at RTFX Ltd.

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