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The U.S. dollar appears to be topping out...again. In mid-December, I noted a technical breakdown in the dollar suggested a double-top had formed in the dollar. The dollar proceeded to plunge for almost 2 weeks straight. But 2009 started with a 2-month sell-off in global equity markets that sent currency traders scrambling for the assumed protection of the almighty American dollar. By the stock market's recent bottom in early March, this stampede sent the dollar to a marginal new high above November's high. Since then, the dollar plunged after the Fed's official proclamation of quantitative easing, drifted back upward in a move that I thought demonstrated some short-term resiliency, and corrected once again. The charts below show that the dollar has made what appears to be a head and shoulders type top even more meaningful than the one last Fall. This time, it is the 200-day moving average (DMA) breaking and not the 50-day moving average. The second chart shows how significant the 200DMA has been the past several years for the dollar.
When the dollar broke the 200DMA to the upside in August, the dollar launched into a swift and steep multi-month rally from multi-decade lows. The last break below the 200DMA occurred in April, 2006. This marked a sustained resumption in the larger downtrend. Given the dollar has been weakening for so long, we should not be surprised that its 200DMA can tell such a strong story. Given that the U.S. seems to be the most committed of the major economies to printing more currency, I am inclined to believe that a re-test of the lows is indeed on the menu. (Of course, I have been biased against the dollar for quite some time anyway).
The technicals are converging with the fundamentals against the dollar. The large 2-month rally in global equities has reduced investors' fears and the need to hide in dollars - it will be interesting to see whether any lasting correction in the market re-adjusts this attitude. China appears to be diversifying away from dollars and into hard assets, like copper. Even oil, much maligned of late and often neglected, has awakened and appears ready for a long and sustained move upwards - a potential confirming signal of a weakening dollar. Now, all we need is for gold to break $1000/ounce...
Be careful out there!
Full disclosure: long USO, GLD. For other disclaimers click here.