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Dollar Index Flight To Safety Has Appeal

Dollar Index Flight To Safety Has Appeal
The dollar index has spent four weeks in a sideways channel that has now confirmed, with very little doubt, that the global central banking community has found fair value on the US dollar. While stocks continue to hold at all time highs the dollar index still has 10% to drop to become aligned with the risk markets. The conclusion can be drawn that once equity trade does move lower to heavily test support, which it will, and will likely be on a non-POMO, non-Monday period of trade, the US dollar would be expected to break the index range that has resistance at 79.50.
The inverse correlation between S&P 500 trade and dollar index movement has been on hold to the greater degree over the course of the last few months, in regard to the percentage moves each market is making. The flight to risk with the unprecedented low-volume buying of stocks has not led to the equivalent move out of safety from the US dollar. Traders will have seen many times previously this kind of divergence, which does signal US dollar bullish undertones. Investors will have to ignore the commonsense theory that high debt levels, high risk exposure, inflationary pressures, high unemployment, and a ravaged housing market in the US will not impede dollar buying in the near term. Many may soon have to get to grips with the fact that as the global reserve currency, when equities drop the dollar will go higher.

The Japanese yen lost ground to the dollar in trade on Tuesday, but unusually the Swiss franc did not move in-line. The Canadian dollar found buyers, as the Australian dollar found sellers in equal number. The great British pound was buoyed by the UK inflation report and thoughts that the Bank of England may be pressured into raising interest rates, while at the same time the euro trod water and traded at the opening price as European trade came to a close.
In general, now would not be the time to be looking to get overweight one side of the dollar or the other, and tenured trainers will be looking for a sustained break from the Swiss franc, one way or the other, to confirm that major currencies are capable of making and holding a sustainable move on the dollar index. Once equities move to test support, the time to get long-dollars will arrive. Patience is key when choppy, overlapping periods of trade are being absorbed.