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Dollar Index Inflection Point

The dollar index is trading around the 76.00 price point, in-line with recent client note updates that have highlighted the importance of the global market holding the greenback above a critical price point area. The breakdown of inverse correlations between the dollar and global equity momentum has left the potential for a 5% drop in dollar index valuations, just to get aligned with current price points on the S&P 500. However, it would seem that global central bankers are unwilling to allow the weak dollar policy being instigated by the Federal Reserve to lead to a drop in dollar index values below 75.50.

Regional currencies are fighting the ravages of US dollar induced commodity inflation, which is pressurizing exporting nations which are absorbing higher commodity costs at the same time as absorbing a deterioration in US dollar values that are increasing the cost of those buying overseas exports. It seems clear from the fact that moves to form yearly highs on S&P 500 trade were not mirrored by the dollar index dropping to the equivalent 72.50 price point that the global banking community is willing to purchase the dollar in an effort to contain commodity inflation.

Over the course of the last 10 years it has been hard to find too many periods of trade that do not have major currency pairs moving as one against the dollar. The last six months of trade however, have revealed a time that has every major currency reacting individually to economic outlooks, and sound-bite headlines. This really has been a historical time in regard to separation in currency pair valuations as the global market travels into uncharted waters in regard to quantitative easing, interbank liquidity, and the impact of social unrest. There looks to be a very defined channel on the dollar index that has 75.50 support and 77.50 resistance, and unless a sustained break of either area is seen most currency pairs will continue to oscillate in their own equivalent price channels.

In general, sustainable price movement looks only to be likely from the next currency that has a central bank interest rate increase, as the market will be forced to realign on the long side of that particular currency, whatever the global traded market is doing at that time. Next week looks to be a pivotal time that will potentially set fair value on currency pairs for the next quarter. Signals, alerts, and updates will be sent to clients as currency markets evolve.