Research Excerpts

The US Dollar: Back To Breakeven For 2011. Now What?

Posted on: Tuesday, October 4th, 2011

Our What We’re Watching Today pre-market opening charts and comments are one of 8 different reports that Asbury Research produces for subscribers, at various intervals throughout the month.

The following (green highlights) is an excerpt from our September 9th What We’re Watching Today report entitled, US Dollar Flirting With A Bullish Breakout.

Asbury Research’s What We’re Watching Today
The US Dollar
September 9th, 2011

In our September 7th What We’re Watching Today (access requires subscription) we pointed out that Euro/US Dollar (EURUSD) was testing major underlying support at 140.20 – which represents major overhead resistance for the US currency versus the euro.  Since then EURUSD has declined by an additional 3% to 1.3697, while at the same time the chart below shows that the US Dollar Index is negotiating a bullish breakout of its own.

(NOTE: The US Dollar Index is comprised of six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc and is 77% weighted towards Europe. The Japanese yen comprises just 14% of this index.)

The chart shows that the US Dollar Index is negotiating the upper boundary of its recent range at 76.78 to 77.18 today , which represents its 200-day moving average (orange line, a widely-watched major trend proxy) and its May 23rd and July 12th highs (upper blue highlights).  Also noteworthy is that today is the first day that the index has traded above its 200-day moving average on an intraday basis since September 13th 2010.

A close meaningfully (more than just a few ticks) above 77.18 would: 1) confirm a near to intermediate term bottom in the index at its May lows, 2) suggest that a major bullish trend change is emerging in the US currency, and 3) target an initial +5% rise to 80.50.

The close above 77.18 that we were looking for took place later that day, as the US Dollar Index closed at 77.90 on September 9th.  It has since risen by 2.53 or +3.2% to 80.43 thus far today, essentially meeting our 80.50 initial upside target.  In addition, the September rise in the Dollar brings it back to unchanged for 2011 for the first time since February 16th.

The rise in the US Dollar Index over the past month was, to a large degree, more of a least of two evils, flight-to-relative-safety out of the euro, rather than a ringing endorsement of the greenback.  Accordingly, we will view the path of the Dollar from here, as it negotiates breakeven for the year,  as an indirect indication of investors’ collective assessment of the European debt crisis — which has been crippling the US stock market since May.