Dollar Index Still Has a Lot of Room to Move

Includes: EU, UDN, UUP
by: Emerging Money

Although the euro has already faltered 4.4% against the dollar so far this month on Irish fears, there is plenty of space left on the dollar index chart for DXY to move even higher.

At roughly 79.70, the DXY has bounced a lot against other global currencies and is now trading securely above the 20-day and 50-day moving averages. This means the dollar has near-term support under it and is unlikely to fall more than 2.5% any time soon -- if, of course, we only look at the technical aspects.

However, the DXY is equally unready to challenge the long-term resistance that the 200-day moving average represents. The 200 mda is currently at 81.77, 2.6% up from here.

With this much potential upside before DXY hits resistance, those in the "risk on" camp should avoid making any extreme bets against the dollar. A little wariness is appropriate here.

That said, the long-term trends still do not favor a more robust move to the upside for the U.S. currency.

It is true that a strong dollar built off strong U.S. economic fundamentals will be a positive factor for traders -- and today's unemployment claims numbers give us more reason to hope.

But remember, the dollar's recent move upward has been born out of the euro's weakness. As the latest round of sovereign credit fears digests, this move will likely unwind.

Watch for a break of 79 on the downside as an indication that the "risk off" move into DXY is ebbing and the "risk on" types are regaining their confidence. A move down to 78.31 would signal the break into a year-end melt upward, putting emerging currencies and commodity markets into rally mode.

Meanwhile, DXY seems balanced between resistance and support, which argues that neither UDN nor UUP-- much less EU or other "risk on" plays -- has the upper hand here.

Disclosure: No position