Surprise! The dollar’s relief rally is not quite over as I had suspected last Thursday (October 27) when the dollar plunged with resounding force below its 200-day moving average (DMA). On Monday, the dollar index surged back above its 200DMA as all of last week’s booming enthusiasm over a deal on Greek sovereign dealt rapidly melted into the same disbelief and skepticism that has characterized the on-going crisis for the euro zone.
In a convincing move, the dollar index followed through with another surge, this time above its 50DMA. I am not expecting the dollar to hurdle over October’s high – especially not with the Federal Reserve on deck for Wednesday – but if the dollar does break that resistance, the relief rally suddenly transforms into a potentially sustained surge.
Source: stockcharts.com
The dollar has benefited from a fortuitous combination of Japanese intervention to weaken the yen by buying dollars and a run on the euro (and away from risk) that has sent traders scurrying to the relative “safety” of the U.S. dollar. Eventually, both tides should lose their momentum, and the dollar should return to creeping back into its secular, long-term bearish trend.
I am staying long the dollar for now and am awaiting the Fed’s next move before deciding whether to reverse course.
For a reminder of the importance of the 200DMA to trading the dollar index see “A Relief Rally For The U.S. Dollar As ‘Safe’ Alternatives Get Expensive.”
Be careful out there!
Full disclosure: net long the U.S. dollar, net short the euro, net short the Japanese yen