It's Not Easy Being Green

10/12/2009 12:01 am EST


Eoin Treacy

Global Strategist,

The dollar's down trend remains intact despite some grumbling and possible intervention by the foreign central banks, writes Eoin Treacy of Fullermoney.

A weaker dollar may be greeted in Washington, DC with open arms, but the corresponding strength in other currencies is becoming problematic for some countries. Invariably these will be currencies against which the US dollar has been weakest, such as the New Zealand dollar. However, speculation is also mounting that the Swiss central bank is selling francs and we now have attempts by the European Central Bank to talk the euro down.

The greenback rallied impressively during the credit crisis as investors sought a safe haven above other concerns. As measures were put in place to combat the global recession and the stock market bottomed from March, the dollar began the current consistent decline. The US Dollar Index's progression of lower rally highs remains unbroken, and while the Index has firmed somewhat above 76, a sustained move above the 78/79 area would be needed to question the integrity of the decline.
Asian currencies sold off aggressively last year against the US dollar, but the downtrend lost consistency from October and bottomed in March. The Asian Dollar Index has since rallied impressively and broke upwards from the volatile ten-month base formation last month. A sustained move below 107 would now be required to question potential for some additional [upward moves].

Commodity-related currencies have perhaps been strongest against the US dollar. The Australian dollar is a notable case in point. Having tested parity in July 2008, the Australian dollar lost 40% of its value by October 2008. It broke upwards from its short base in April and continues to trend consistently higher. A sustained move below 82.5 cents would be needed to trigger a stop and question the integrity of the advance.
The Latin American Dollar Index is heavily weighted by commodity-related currencies and also bottomed in March. It continues to range with a gradual upward bias in the region of 105, and a sustained move below 102.5 would be needed to indicate a loss of demand dominance.

From these charts we can ascertain that the dollar remains in a consistent down trend. However, it has fallen to an extent that questions are beginning to be asked about how much further it can fall without causing issues for its trading partners. A sudden stock market reaction may be a catalyst to pressure leveraged trades and would probably add support to the dollar. Nevertheless, as long as the current supply/demand dynamic remains in place, we can continue to give the benefit of the doubt to the down side.

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