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Currency Market: US Dollar Index Has Stabilized, and Might Even Head Higher


Continued weakness in the British pound and Japanese yen has pushed the USD above resistance.

The US Dollar Index has stabilized above the 80 level. Now the 200-day moving average near the 81 level will be the next major hurdle for this market. It seems that -- with this start of "currency wars" and significant weakness in the British pound and Japanese yen -- the US dollar is finding itself in a decent position as the best house in a bad neighborhood! Therefore, as long as the US Dollar Index stays above 80.5 there is no reason to stay short, and I would actually look to get long the US dollar, especially if it can break out above 200-day moving average resistance at the 81 level.

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I have also been long and wrong on my gold call. While longer term I still think this is a market that has plenty of upside, short term the strength of the US dollar and inability to rally off the 200-day support just above 1650 has led this market to break down sharply over the past week, falling straight to the 1600 level. The prior support of 1650 should now turn into resistance, and I think any rallies on gold into the 1650 level will most likely be sold. I think it is best to move to the sidelines here until the commodity can rally back above the 1675-1700 level, which would confirm this down move as a shakeout.

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The euro has been the lone outperformer recently against the US dollar and is pretty much the only major currency that looks strong. Of course, this goes against conventional wisdom that Europe is still in trouble, and shows why sometimes the best trades are the hardest to make. The euro should have significant near term support around the 1.33 level, and it seems like it is trying to turn back up after a slight correction so far this month. It will be interesting to see if this currency can hold up this year, as we know we will certainly see more bearish headlines on Europe. It's been a tough start with stops getting hit on some calls early in the year, but you have to keep taking swings if you want to get on base. Good luck!

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Position in euro futures.
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