Two Views of the US Dollar

Several markets seem to have reached an important juncture. As inflationary pressures build within the US economy as a result of $70 oil and new money creation to fund the federal government budget deficit, the stock market appears to be tipping over. Also, yields on the 10-year T-Note seem more comfortable over, rather than under, 5%, suggesting long-term interest rates will continue climbing. But for now the T-Note is trading around 5%, which is its critical level.

Another market sitting 'on the edge' is the US dollar. I remain a long-term dollar bear, and until some of the problems that are debasing the dollar are fixed, there is no reason to change my point of view. But the following two charts of the US Dollar Index present the bearish and potentially bullish case.

The above chart presents the bearish picture of the Dollar Index. The downtrend channel (red parallel lines) confines this Index, which recently broke down from a 1-year consolidation (the small uptrend channel formed by the green parallel lines). But here's another picture of the same Dollar Index.

In this chart the Dollar Index appears to be forming a 'head-and-shoulders' pattern. These patterns often mark important trend reversals. This pattern would be completed if the Index crosses above the neckline (the horizontal green line), signaling that a trend reversal and a dollar rally were underway.

So which will it be? Well, there's the rub. No one knows the future, so all we can do is watch and wait to see how these two charts develop. What's more, the Dollar Index will I expect impact gold.

We can see on the above chart the swiftness and depth of the current correction. What went up so quickly is coming back down just as fast, but don't lose sight of the fact that as of Friday's close, gold this year is up 17.6% while silver has appreciated an eye-popping 26.7%. By any standard, these gains are remarkable, even more so when recognizing that they were achieved in less than six months.

In my April 16th alert when gold was still trading under $600 per ounce, I identified $715 as gold's next resistance level. Indeed, gold stopped at $719.80 on May 11th, and it has been pretty much all downhill since then. But the question is whether gold's correction ends here at $600? I think the answer lies in the above charts of the Dollar Index.

If the dollar rallies, the odds increase that gold may fall back further, say, toward its 200-day moving average currently at $540 and rising about $0.80 per day. But if the dollar stays within its current downtrend, then the odds suggest that the $600 level on gold will hold. So the next few days should be interesting ones to see whether the Dollar Index starts heading back toward - and eventually falls through - the 84 level.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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