A Closer Look at the Dollar Rally

Includes: ERO, GBB, UDN, UUP
by: Michael Shedlock

Bloomberg is reporting Euro Falls the Most in 8 Years on Reduced Bets for Higher Rate.

 "This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth," said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. "The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth."

There were significant moves again on Friday. Let's compare a few charts and see what happened. (Click on charts to enlarge.)

$USD - US$ Index Daily (Thursday Evening)

$USD - US$ Index Daily (Friday Evening)

Thursday evening I said:

On the daily chart the US$ crossed resistance and sitting right on the 200 day exponential moving average. It has not closed above the 200 EMA since March of 2006.

The 200 EMA has been decisively taken out. This is a major breakout on the daily chart. The 200 EMA should serve as support going forward if this rally is for real.

$USD - US$ Index Monthly (Friday Evening)

The US$ is now sitting on the monthly downtrend line. This is major decision time. Dollar bears better be considering the possibly that the long slide from 2000 is over, at least for a cyclical bounce. A break above this trendline could lead to a rally to 85 or even 90. Note the year long dollar rally in 2005. We could be in for a repeat.

$XEU - US$ vs. Euro Weekly
(Thursday Evening)

$XEU - US$ vs. Euro Weekly
(Friday Evening)

Thursday evening I said:

On the weekly chart there is a clear double top. This is now a third test of the 152-153 area. I did not think the last test would hold but it did, moving on to a double top. With the Fed on hold and Trichet's likely next move a cut, there is plenty of room for the dollar to rally vs. the Euro.

That sure did not take long. Support is now at 147.5. If that does not hold, the weekly and monthly uptrend lines will be broken. Furthermore, given that the Euro is 57% of the US$ index, if the Euro breaks down, the US$ index weekly and monthly charts are going to break out.

$XBP - US$ vs. British Pound Weekly
(Thursday Evening)

$XBP - US$ vs. British Pound Weekly (Friday Evening)

Thursday evening I said:

The British Pound broke the weekly uptrend line and has been floundering in a sideways channel for about 8 months. However, the bounces appear to be weakening and it's do or die for the pound right now. I doubt support holds this time.

$XBP - US$ vs. British Pound Monthly (Friday Evening)

The monthly uptrend line in the British Pound is now broken. One must give these things a little room, but it appears this is it.

Based on action in the US$ daily chart and across the board with the British Pound, this is either one hell of a headfake, or the weekly and monthly dollar charts will soon follow suit. Dollar bears and commodity bulls could be in for some considerable pain if that happens.

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