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U.S. Dollar Back on the Radar



First, a bit of news: an article in the newspaper this morning claimed that 147 percent of a whole lot of high school seniors are not very good at math and science, including such subjects as astrology, which is the scientific study of the Astros, a baseball team from the state of Houston, and chemistry, which is the study of male and female relationships.

Of course, as a product of Kentucky public schools I understand I shouldn't be throwing stones from my glass house. When I was a high school senior we were ranked 48th or so out of the 63 states that make up the United States, or something like that.

Anyway, that's all beside the point. What I really want to talk about is the renewed focus on the U.S. dollar. As today's article in the Wall Street Journal points out ("Dollar's Strength Against Euro Could Trim U.S. Corporate Profits") the U.S. dollar is finally back on the radar screen.

Interestingly, bulls and bears alike have alternately taken up both sides of the dollar debate. A weak dollar is bullish, according to conventional wisdom, because it makes U.S. exports more competitive. A strong dollar might also be bullish, however, because it attracts foreign investment into the United States.

On the other side of the coin, some have argued that a weak dollar is bearish because it signals a loss of faith in the dollar which is, by virtually any standard, the world's currency, a global monetary asset. By the same token, a strong dollar can also be considered bearish, at least as the converse of the bullish weaker dollar boost to U.S. exports argument.

So how do we sort through all of this? Below is a chart of the U.S. Dollar Index. As you can see, the primary trend for the dollar remains negative, but with plenty of room to move higher before primary down trend resistance is met in the 103-104 area. Meanwhile, the intermediate term trend is positive and the short-term trend is showing a more orderly series of higher highs and higher lows for the first time since the move in October, 2001 that led to an eventual lower recovery high at 120.50. Previous pauses in the decline of the dollar have been less orderly and thus have appeared as simple pauses, or continuation patterns, along the way down.
On a near-term basis, the fact that weekly momentum has now been positive for 10 weeks (weekly momentum readings typically last for 6-8 weeks) raises the possibility that this move higher for the dollar is aging, or at least slowing.

For now, I remain bearish on the dollar on a long-term basis, but the technical and fundamental factors in place to maintain a more bullish short and intermediate term trend merit respect according to the point & figure chart. On the downside, the first sell signal from here would occur at 95.50. Stay tuned. This is an important piece in the big picture puzzle.

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No positions in stocks mentioned.

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