By Jim Donnelly, Olson Global Markets

In the wake of China’s second interest rate cut in less than a month, a cut in the European Central Bank’s benchmark rate to 0.75%, and a cut in the ECB’s deposit rate to zero, the U.S. Dollar Index rebounded last week and resumed its upward path. Downbeat comments from ECB President Mario Draghi suggesting that economic growth in the Euro Zone remains weak and will likely stay weak for some time, added to U.S. dollar strength. Further, China’s latest rate cut increased worries that China’s growth rate is declining at a faster pace than had been previously feared.

In addition, a weaker-than-expected rise in monthly non-farm payroll of 80,000 sent yields on U.S. Treasury debt solidly lower on Friday, which in turn boosted dollar strength. It also raised expectations that another round of quantitative easing may be coming in the weeks ahead despite the recent extension of “operation twist”.

However, it was the cut in the ECB’s benchmark interest rate that spurred Denmark to cut its base interest rate by 0.25% causing one of its secondary interest rates to dip into negative territory for the first time ever. Market rates for various short-dated debt issues of Denmark, Switzerland and Germany have posted negative readings from time to time during the past year or so. Still, negative interest rates on German debt have begun to move out the yield curve with 2-year notes falling into negative territory just last week.

Despite overbought conditions on long-term charts, a break above key downtrend resistance at 81.25 in May suggests the U.S. Dollar Index (DXY) has more upside ahead of it. Major trend line resistance currently sits at 86.70 and has a reasonably good chance of being tested in the weeks or months ahead. If it does, a drag on exports and decline in corporate earnings could result in future quarterly reports, which will likely put downward pressure on equity prices as well as inflation as the year progresses.

http://www.ogmarkets.com/