Where's the U.S. Dollar heading next?

• ragheehorner
• September 18th, 2009

Part of every forex trader’s day is to determine whether today will bring a weak or strong dollar.  The movement in the majors depends on it.  On weeks where major economic events are a factor there’s certainly the effect of the “wait and see” mode as no one wants to be the tall poppy.  As you know the tall poppy is the first to get cut!

While I am a Chartologist focused on price action I know that I can never ignore the psychological impact of economic data releases.  We’re going to take a look at one of my market pulse charts:  A comparison of the U.S. Dollar Index and the Dow Jones Industrial Average.

It all starts with the impact on the U.S. Dollar.  Right now the risk aversion play is to sell the dollar as the Dow Jones rallies.  That means that pairs like the $EURUSD will gain with equities strength because the euro is a higher yielding currency (1.00%) as opposed to lower yielding currencies like the yen (0.10%) and the dollar (0.25%) which will weaken.

Now what makes the dollar dollar move?  Well, that’s often a chicken and egg discussion but typically a weak dollar will move commodities higher.  That means that the Continuous Commodity Index and crude oil will move inverse to the dollar.  However there are events that will effect the dollar after moves in those two contracts have been made.  Keep an eye on the stability of the correlations and you’ll be just fine.

So where’s the relief rally we keep hearing about that the dollar is due for?  First we need a support level off which prices to correct.  No floor, no bounce.  It looks like for now 76.00 is where the buyers are stepping in. The low is 76.01.

It’s important to point out that the market cycle is still in a downtrend and that until prices clear the 78.20 level on this daily chart the longer term view is that any bounce is simply a correction and not a reversal.   So we’ll watch for any risk aversion in equities and for now that will be seen in the way buyers support 9,800 on the Dow.

- Raghee

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