U.S. Dollar Index Extends Higher with Big Test in View


By Jim Donnelly

A set of better-than-expected Q1 earnings reports, a marginally improving jobs picture, falling demand for raw materials globally and an increase in central bank interest rate cuts have helped the U.S. Dollar Index (DXY) resume its upward path.

From a technical point-of–view, the DXY is approaching a test of key trend line resistance at the 86 level on long term charts. In the absence of overbought conditions at the moment, the greenback could be in position to “breakout” to the upside and carry much higher.

Although it is a bit premature to speculate whether a trend line “break” will actually occur, it is interesting to note that since early 2003, the U.S. dollar index has arguably been tracing out a broad, bullish “reverse Head & Shoulders pattern. That pattern targets an eventual move up to the 105 area. Coincidentally, key long-term trend line resistance, which currently sits near 102, rises over time. As a result, an eventual test of the 105 area would not be out-of-line.

A growing U.S. economy, no doubt, will likely lure foreign funds into U.S. investments over the short-to-intermediate term. But a prospective move of this magnitude on the dollar index could have drawbacks later on. To start with, a move toward 102-105 would imply that inflation fears going forward would likely be tempered, with the possibility of deflation becoming a modest “risk”.  Further, domestically produced goods and services could face increasing price competition from global businesses which, in turn, could crimp margins and eventually earnings growth going forward.

Nevertheless, the prospect of economic and earnings growth in the U.S. could become enhanced by a further move toward energy self-sufficiency. If so, reduced energy costs could give U.S. companies the edge they need to keep a competitive advantage for years.

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

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