Mapping the Market: Dollar testing the water for recovery

By Peter Stoneham

May 13 (Reuters) - The dollar has surrendered almost all of the gains it made since the start of the U.S.-Iran war as the initial flight to safety into the U.S. currency gave way to ceasefire and hopes for a peace deal, but the greenback has leveled off lately and it is now testing the possibility of a rebound.

The dollar index, which tracks the U.S. currency against six major counterparts, has fallen as much as 3% from its Iran-war peak of 100.64 struck at the end of March, according to data supplied by LSEG.

In fact, the dollar had appeared to be on the precipice of deeper losses when it briefly fell this month slightly below April's low of 97.63 as optimism over a possible U.S.-Iran peace deal grew. However, it quickly rose off that level and has been on the mend in recent sessions as peace talks hit another stalemate and the U.S. reported unexpectedly strong inflation for the month of April.

The U.S. currency rose on Tuesday above a closely followed technical level called a 23.6% Fibonacci retracement. Traders use Fibonacci retracements to identify where the balance between buyers and sellers may shift.

Traders often see 23.6% Fibonacci levels as places where the market takes a break before resuming the previous direction of travel, which in this case would be down.

However, if the dollar can establish a solid foothold above this Fibonacci level, which is at 98.335, then it would signal the possibility of a bigger recovery.

A sustainable rise above 98.335 could raise expectations the dollar could advance to other key Fibonacci levels in the series, including 99.132 and 99.488.

However, if it were to close below 97.623, this month's low, then traders would expect more losses, possibly to 96.492.

What the chart shows:

• The dollar index has stabilized after falling from its Iran-war peak

• Establishing a foothold above 98.335 will raise expectations of further gains

• Next stops on the path higher could include 99.132 and 99.488

(Daily markets commentary from Reuters analysts on the signals financial charts are sending - and what they might mean.)