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Currency Market: US Dollar Index Continues to Chop Around the 80 Level


The Japanese yen's weakness is really the only thing holding up the US dollar.

The US Dollar Index continues to trade just under the 80 level, and if the longer-term trend is indeed higher, it should find support here at 79.

I continue to like the risk-reward in US Dollar Index long positions, and I think this is probably the best risk-reward trade available in the markets right now.

Downside should be limited to the 200-day moving average just below 78, while much longer term you could make a case for a move back to the 2001-2002 highs around 120. Anytime you can find a reward-to-risk setup of 20-to-1 in the markets, I would consider that a fat pitch!

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The euro will be critical for the US Dollar Index because it is such a heavy weighting, and it looks like the euro is forming a head-and-shoulders top pattern here around 1.32. A move back below 1.30 would confirm this and project a move down to new lows at 1.25. That would also break significant levels on the weekly chart, and longer term I think the euro could easily trade back to parity with the US dollar. See the weekly chart below, and it certainly does not look bullish!

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The weakness in the Japanese yen is really the only thing keeping the US Dollar Index well bid, as most of the other currency crosses are trending higher against the US dollar short term. The yen has had a very sharp downtrend so far this year, and it is probably one of the bigger stories in the currency markets this year. Remember that this is a very long-term trend line that has broken to the downside, so it could still go much lower. Any rallies in the Japanese yen should be used to sell. See the trend line break below.

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Keep a close eye on this US Dollar Index because I think this could be the entry point for what could be one of the bigger up trends over the next couple of years. We'll have to see what the market has in store for us…good luck out there!
Positions in EUO, EURUSD, GBPUSD
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