A Relief Rally for the U.S. Dollar As “Safe” Alternatives Get Expensive

(This is an excerpt from an article I originally published on Seeking Alpha. Click here to read the entire piece.)

It took a whole month before the dollar finally launched into the relief rally I thought would soon follow the S&P’s downgrade of U.S. government debt. Even after the Swiss franc’s rein as a “safety” currency ended a few days later – first with a threat and then the implementation of a currency peg – the dollar continued to drift lower. A fresh run on the euro that has sent currency traders scurrying for the dollar instead of the franc has sent the dollar index soaring nearly straight up. {snip}


The U.S. dollar index breaks out
The U.S. dollar index breaks out


{snip}…the 200-day moving average (DMA) has been an important line of support and resistance for the dollar index for year…{snip}


The dollar's slide was persistent even as the U.S. came out of recession
The dollar's slide was persistent even as the U.S. came out of recession

{snip}


The dollar's secular downtrend resumes after breaking the 200DMA in early 2005
The dollar's secular downtrend resumes after breaking the 200DMA in early 2005

Finally, since 2008, breaks above and below the 200DMA have preceded large and sustained moves in one direction. Assuming the pattern repeats, the dollar’s latest relief rally should continue for several months if not longer.


The 200DMA has recently served as an important predictor of the dollar index's near-term future performance
The 200DMA has recently served as an important predictor of the dollar index's near-term future performance

*All charts created using TeleChart

Currency traders may get more inclined to return to the dollar for “safety” because it is now “cheap” relative to the existing alternatives like U.S. government debt and the Japanese yen…{snip}…The Swiss have created a peg of 1.20 against the euro. If the euro continues to sell off, their resolve will surely get tested…{snip}…I have positioned myself long the franc in order to play just such a test.

…{snip}…After all the dust settles, I expect gold to emerge from the constant manipulation and devaluation of currencies even stronger and higher than it is now.

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha. Click here to read the entire piece.)

Full disclosure: long TBT, net long Swiss franc, net long U.S. dollar, short Japanese yen, long GLD and GG

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