Can U.S. Dollar Index Break Above Key Resistance?

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By Jim Donnelly, Olson Global Markets

With additional reports suggesting that the economy is improving at a slow and measured pace, the U.S. Dollar Index (DXY) extended higher last week, posting a 3-year closing high of 84.449. Falling precious metals’ prices combined with rising yields on 10-year Treasury notes added to the dollar’s luster as investors “priced in” the prospect of the “taper” beginning sooner than expected. As a result, the U.S Dollar Index (DXY) is now approaching a test of key trend line resistance that currently sits at 85.85.

In the absence of overbought conditions on long-term charts, there is a possibility that the U.S. Dollar Index could break above the 85.85 level. Such a “breakout” would then focus attention of currency traders to the possibility of an eventual test of key trend line resistance that currently sits at 101.40, but rises over time. Adding to that possibility is the likelihood that a broad bullish reverse Head & Shoulders pattern that targets the 105 level (and began to form in 2002) may be underway.


A rise in the value of the dollar of that magnitude, however, would reinforce that possibility that disinflation, or even deflation could result as import prices decline relative to domestically produces goods and services. This clearly is not the scenario that most policy makers currently embrace, since it could retard employment and wage gains in future months and years.

For the time being, however, a steeper yield curve has buoyed the equity values of most banks, since profit margins are now increasing. Moreover, the willingness to expand lending volumes could help businesses ramp up capital spending plans as well as their hiring plans, which could offset the headwinds of a strengthening greenback.

DXY Monthly Bar Chart

Created with AmiBroker - advanced charting and technical analysis software. http://www.amibroker.com

 

UUP Monthly Bar Chart

Created with AmiBroker - advanced charting and technical analysis software. http://www.amibroker.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Economy , Options , US Markets

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