Vertiginous dollar set for limited correction after 10% Q3 surge

Aug 10 (Reuters) – After a 10% surge in Q3 to Tuesday’s 20-year high of 114.78, the dollar is ripe for a pullback as quarter-end position squaring sets in, with 112.06 the nearest important support amid the broader uptrend.

A retreat would correct monthly RSI levels that have hit their most overbought since Q1 2015 — RSI levels which are not far from 1985’s record highs hit before the Plaza Accord weakened the dollar.

The 50% and 38.2% Fibos of rises from Sept. 20 and 13 swing lows and the daily tenkan are support at 112.06. Prior corrections from less extreme overbought conditions since March all tested the tenkan and the kijun, the latter last at 111.16.

Aggressive Fed rate hikes and expectations have powered the dollar’s advance as the ECB, BoE and BoJ lagged.

And though 2-year Treasury-bund yield spreads are now 74bps below their August peak and Treasury-gilt yield spreads went from -1.37% in August to +0.44% on Tuesday before the BoE announced emergency QE, Europe’s economy and currencies remains more at risk.

Falling US jobless claims and upwardly revised Q2 PCE reinforced Fed tightening and should limit dollar downside.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)