Before you start reading this article, please turn on your stereo or mp3 player and queue up Kenny Loggins’ “Danger Zone,” or just watch this youtube video in the background.
In 1971, the value of the dollar index was roughly 120. By 1981 the dollar index had seen a decline to about 85.0 This means that in the span of a decade, the dollar lost 29% of its value. Pretty harsh, eh? Well, from 1981 until about 1985 the value of the index went from 85.0 to a stunning 165.0 …a gain in value of 94% in four short years. Pretty impressive, eh? By the mid 1990′s the index gave it all back and hovered at a low of around 82.0
From 1995 until 2002 the index rebounded off these lows to a high of 120. It’s been a downhill ride ever since, and this brings me to my latest technical analysis study:
This is what a six-month chart of the dollar looks like when the dollar gets inflated by Ben Bernanke while simultaneously being shit-on by the international community:
US Dollar Index (Six Months)
And this is what a one-year chart of the dollar looks like as much of the same happens:
US Dollar Index (Twelve Months)
According to Brian Swint and Mark Deen at Bloomberg:
U.S. Treasury Secretary Timothy Geithner said on Oct. 3 that it is “very important” for the U.S. to have a strong dollar.
Let me translate that for you:
U.S. Treasure Secretary Timothy Geithner said “Fuck you” to the central bankers of the world, and then he smiled.
And this is what three years of “Fuck You With A Smile” looks like:
US Dollar Index (Three Years)
The dollar has done some amazing things in the last three years. We have seen a decline from 86.0 to 71.0, a full retrace and then some to 88, a dump to 77, a retrace to 89 and an all-out dump to 75. So what’s next after this? Let’s have a look at some more charts and see what we can deduce:
US Dollar Index Support and Resistance Study (3 years)
The first thing I like to do in any technical analysis, whether it be for a stock, commodity futures contract, index, forex, etc… is to do a high-level Support and Resistance Study. This always gives me a clear picture of where things have been and where they could go. Additionally, I can get a good idea of where the bulls and bears are going to fight the hardest.
As you can see, just like in the movie “Back to the Future”, 88 is the magic number for resistance. Break through 88 and we’re going back in time, however, as Doc may have said, “Where we’re going, we don’t need dollars!”
Moving right along… you will see, in this case, there is intermediate support at 74.0 on the Dollar index. Major support is at 71.8 We are almost at the big dollar support fight. So, who wants a strong dollar?
“We all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar,” Trichet said in Luxembourg yesterday. “We want a strong dollar; we need a strong dollar,” French Finance Minister Christine Lagarde said today. (Bloomberg)
Allow me to translate the words of Mr. Triche and Ms. Lagarde into something you might understand:
Where is our reacharound? Eh Timmy? Have some courtesy.
This chart shows you why these guys are begging for a reversal. If the dollar doesn’t find support at 74, it’s a quick slide to 72, and that’s where the real trouble zone happens to be. You see, the dollar index has never been lower in its history. When the floor gives way, there’s no stopping the fall. The index would be literally moving into uncharted territory. With that being said, the next question is: If the strong dollar policy continues, how low will the dollar index go?
Let’s have a look at another couple of charts to find out:
US Dollar Index Pitchfork Study (Three Year)
In this technical analysis of the dollar, the blue lines are an Andrew’s Pitchfork, aka a Median Line Study. According to Investopedia, an Andrew’s Pitchfork is:
A technical indicator that uses three parallel trendlines to identify possible levels of support and resistance. The trendlines are created by placing three points at the end of identified trends. This is usually achieved by placing the points in three consecutive peaks or troughs. Once the points have been placed, a straight line is drawn from the first point that intersects the midpoint of the other two.
You can clearly see the strong dollar policy in action in this chart. Assuming the slope of the devaluation keeps steady, we could see the dollar index floating near 66 by 2012. However, as demonstrated in the next chart, if the floor gives way in the near term, things might be a bit more drastic.
US Dollar Index Median Line Study (Three Years)
If the downtrend remains in the channel, we could see the dollar index at 63 or lower in the span of about a year. I know there are a ton of economic factors that play into all of this, however, the picture painted by the charts is one of economic warfare. We are witnessing a battle royale between the central banks of the world and the United States via Federal Reserve/Treasury.
By now I bet you’re asking yourself “How do I make money off this?” Well, if one was to believe that the dollar is going to continue to slide, one could purchase shares in the UDN etf, or go long Euros, Swiss Francs, Yen, or just about anything that isn’t Dollars. I like gold personally, but that’s for different reasons altogether.
Conversely, if one were to believe that central bank intervention is on the way, one might choose to purchase shares in the UUP etf, short some currencies such as the Euro, GBP, or Swiss Francs, or maybe even sell some GLD or SLV (how dare you!).
So there you have it folks, the global battle royale of the century is unfolding before our eyes and I don’t think the dollar is going to win this one.
