US Dollar: Too High, Too Fast

After consolidating and making a continuation pattern between 76 and 77, the US Dollar Index [DX] broke out above 77 ½, traded as high as 79.077 on Thursday and then closed Friday at 78.932.

For a currency with many trillions outstanding, we think a 10.87% move in seven weeks is “too high too fast” and we should now expect a correction back to 76 or perhaps even 75. The apparent overhead resistance is at the 80 level where it made a pivot at 80.39 before turning higher on December 27, 2004, and then again when it traded between 80 and 81 for six weeks during the summer of last year. While exchange rates move primarily in response to news that alters expectations about the future economic environment and the relationships between economies, this rapid move has the look of short covering.

We now suggest unwinding or at least hedging long US Dollar or short Euro positions.

Disclosure: Currently I do not have any positions in US Dollar Futures, ETF's or Options.