SFO Magazine: US Dollar Flirts With Dangerous Levels
Friday, April 27, 2012
By J.C. Parets
The U.S. Dollar is flirting with some pretty dangerous levels.
We already know the Dollar Index has been in a decline for 10 years. So with that in mind, we are in the camp that the dollar rolls over again and makes fresh lows. I haven’t seen any evidence of the bear market coming to an end. At least not yet.
Since 2008, the U.S. Dollar Index has been in a volatile 20-point range. With highs near 90 and lows towards 70, but the past year has seen a much tighter consolidation. The current uptrend line from last summer’s low is being tested for the fifth time. This is usually the one that cracks. Because remember that the more times that levels are tested, the higher the likelihood that it breaks.
The Relative Strength Index (RSI) is my momentum indicator of choice. When prices make new highs, we also want to see RSI confirm that with new highs of its own. Unfortunately for the U.S. dollar, the new highs in January were not confirmed by RSI. These lower highs in momentum are a sign of weakness. And with the dollar testing this trendline, we’re watching 78 as the last line of defense for the bulls. After the break is confirmed, we’re looking at a 76 target and then 73. In the currency world, these are huge moves.
As a result of a weaker dollar, I would expect assets priced in U.S. dollars to do well. If the denominator in a fraction weakens, the numerator is going to appear that much more attractive. The metals and energy space particularly stand out in that sort of environment. Precious metals are certainly in line to benefit as well from the potential dollar rollover.
If the U.S. dollar were to turn right around and get back above 81, then I would have to reevaluate our short-term bearish position. But with the long-term downtrend still intact, and a short-term trendline break on the horizon, it’s hard for me not to give the dollar bears the benefit of the doubt.
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