The US Dollar Index (USDX) has been bouncing back by more than 12% since the bottom posted in mid-July. Actually this low level was the second leg of a “double-bottom” pattern which is a strong basis for a rebound. This is what happened and now the Dollar Index has retraced 61.8% of the bearish trend started in October 2006 and ended then at mid-July 2008.
This bearish trend (between points A and C on the chart) drove the Dollar Index from 87.14 to 72.5.
The Paulson plan has been made official and it should temporally inject some fresh air on the markets. We don’t know really know yet if this plan will be efficient, and we already know that it will increase the US debt above 70% of the GDP…which, on a long-term time frame, should weigh sooner or later on the Greenback’s value.
However the US Dollar is not a stock therefore its value also depends on the forecasts of the other currencies. This is what made investors decide to buy back the Greenback since July. The reason is that the Euro, the other most traded currency in the world, does not convince at all. The recession seems to be unavoidable in the Euro zone. The ECB has already shown signs of future easing credit conditions to try desperately an impulse of growth in its economic area.
This weekend, a G4 summit (France, Italy, Germany, UK) stated a coordinated action plan to bail-out any potential collapses. The 4th biggest bank in Germany, Hypo Real estate, has been saved thanks to the guarantee of the German government. Dexia , Fortis and Unicredit have been on the edge, and other banks in Euroland and in UK may face big problems in the near-term.
It means the market may focus now more and more on the Euro side! In this scenario the Euro has been considered as overbought and that’s why it crashed from 1.60 to 1.35 those past weeks. The Australian Dollar, with the sell-off on commodities markets, also fell from 0.9850 in July to less than 0.72 today. Rates cut in Europe, UK and Australia would tighten the interest rate differential with the US Dollar, and this also argues for a stronger US currency.
As the US Dollar index has retraced 61.8% of its previous bearish trend, this level of 81.5 may act as an intermediary resistance. Profit-taking may the driver of some pull back towards 79 or 78.
Nevertheless the most important indication in this current situation is that the oscillators are not overbought yet. The 14-day RSI and the 21-day CCI did not reach peak points or previous high levels. This means that it is likely that the US Dollar momentum is not finished yet and that a further move, first towards 84, is probable. 84 is a previous high point that may be the new target.
Good Investing,
Gabriel
