U.S. Dollar Falls Despite Strong U.S. Economic News. Why?

And more importantly, what's next for the buck? 

A slew of positive U.S. economic reports hit the morning newswires on March 3:

•U.S. initial jobless claims fell to their lowest level since 2008
•U.S. unemployment aid requests fell to a 3-year low
•U.S. productivity in Q4 2010 rose strongly, while labor costs fell
•U.S. stock futures pointed to a strong open -- and the DJIA shot up 150+ points right out of the gate

Oh, and crude oil fell on March 3, too -- not by much, not below $100, but hey...

So here's the question: If most investors had to forecast which way the U.S. dollar would move after news like that, you'd probably think, “Up!” -- right?

Right. Yet the USD declined on March 3. The losses started early in overnight trading, and at 8:30 AM -- just as the “good news” above was released -- the dollar took an especially hard beating. The EURUSD (the euro-dollar exchange rate and the most actively-traded forex pair) shot up from near $1.3750 on March 2 to $1.3970 on March 3, a 220-pip rally.

To be fair, there was one fly in the ointment of the day’s “good news”: European Central Bank President Trichet hinted that they may raise interest rates next month -- which, in “fundamental” theory, is bullish for the euro. But is a possible rate hike next month really worth that much more than the hard facts suggesting a U.S. economic recovery already under way? Why did forex traders choose to overlook the slew of real, current positive U.S. economic reports in favor of a future promise of “good news” from Europe? What colored their judgment to such a degree?

From an Elliott wave perspective, the answer is -- collective psychology. This reaction shows you how important the perception of news is for market participants; their perception is not rational, but emotional. When forex traders feel bullish, they buy regardless of “bad news.” When they have a bearish bias, as they clearly did against the U.S. dollar on March 3, they brush off any “good news" and sell. In other words, it's not the news that matters, it's the focus and interpretation.

So what does this stubborn bearishness imply for the USD from here?

Our intensive Currency Specialty Service monitors the EURUSD and a dozen other forex pairs in real time. In the latest intraday update (posted at 1:25 PM Eastern on March 3) Service editor Jim Martens says that for now, “the rally from 1.3833 appears incomplete.” He then gives subscribers a short-term upper price target to look for in EURUSD.

As for the longer term, Jim's daily forecast reminds subscribers that the EURUSD’s Elliott wave pattern suggests a major move of a different kind. Jim also quotes two market sentiment measures -- the Daily Sentiment Index and the Commitment of Traders data -- that show extremes similar to those we saw at the major turning points in November 2009 and 2010.

For complete details, see our latest daily and intraday forecasts inside Currency Specialty Service online right now.

Article Source:  http://www.elliottwave.com/freeupdates/archives/2011/03/03/U.S.-Dollar-Falls-Despite-Strong-U.S.-Economic-News.-Why.aspx