Here’s where the dollar’s rally ends.

IMHO…

Big statement but here’s my support.

It starts with the lack of acceleration through the “00″. Breaks through major psychological level – of which the “00″ is the most significant – can often lead to momentum as prices find footing at the “00″. When this doesn’t happen, I have to stop and wonder why…

The dollar’s bounce was on par with the pullback in the Dow Jones, an inverse correlation I watch closely.

5-25-2011 2-12-22 PM.jpg
Chart courtesy of eSignal with my GRaB and 34EMA Wave plug-in.

The U.S. Dollar Index overlaid with the Dow Jones (e-mini). This chart is often an excellent visual representation of the push-pull relationship of these two contracts which can often shed light on risk appetite and risk aversion.

It’s logical then that if the Dow Jones has completed it’s correction lower, then the U.S. Dollar Index has also reached resistance. Again, it’s back to that lack of acceleration to the upside of the dollar after breaking 76.00.

Here’s another view of why the dollar may be struggling to reach for higher highs and attract more bullish momentum.

5-25-2011 2-21-35 PM.jpg
Chart courtesy of eSignal with my GRaB and 34EMA Wave plug-in.

The weekly U.S. Dollar Index has corrected higher to the 20 period SMA and 34 period low. Notice also there is no support above the 38.2% Fibonacci Retracement and therefore this level – despite being pierced – is still resistance. The trend on the weekly also remains down with the 34EMA Wave moving at a “four to six o’clock” angle throughout 2011.

If risk appetite has resumed the tolerance for more risk will send the dollar lower while sending crude oil and the Dow Jones – two of my Forex Market Pulse charts – higher.

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  • Aman

    Finances (Forex market)

    Introduction to the United States Dollar
    The United States dollar is by far the most significant currency in
    the global market; it is the dominant reserve currency of the world, it
    represents nearly half of the trading volume of the major currencies,
    and it is the default currency for most transactions. Given that the
    U.S. economy is far and away the largest single economy in the world
    (close to three times the size of second place China), it is not
    surprising that the U.S. dollar holds the position that it does. (For
    more, see Top 6 Factors That Drive Investment in China, India and other
    growing markets.)
    The U.S. dollar has not always held this position. Prior to World
    War II, the British pound enjoyed much of the same influence and
    prestige that the dollar currently holds. As the U.S. dominated the
    post-war economic landscape, though, the significance of the dollar
    increased accordingly.
    The central bank of the United States is the Federal Reserve. Like
    most central banks, the Federal Reserve balances a mandate to both
    encourage economic growth and control inflation. The huge scale of the
    U.S. federal bond market complicates the Fed’s mandate to some extent;
    Treasury bonds are popular around the world and seen as a proxy for
    risk-free investment. Interest rates in the United States were quite low
    during the credit crisis as the Federal Reserve tried to stimulate the
    economy, but worries about persistently high budget deficits and a
    growing national debt suggest a real risk of higher rates in the future.
    Because of the size of the U.S. economy and its bond market, the
    actions of the Federal Reserve can have a disproportionate effect on
    interest rates around the world. (Find out how the Fed manages bank
    reserves and this contributes to a stable economy. For more, see How the
    Federal Reserve Manages Money Supply.)
    The Economy behind the U.S. Dollar
    Although the U.S. economy is the largest in the world, most of the
    focus on it in the post-housing bubble world is on the growing problems
    that threaten that top position. With the exception of the last three
    years of the Clinton presidency (and the first year of the Bush
    presidency), the United States has run persistent budget deficits since
    1950 and faces a growing national debt. What’s more, future obligations
    to Social Security, Medicare, Medicaid and debt repayment create a
    significant potential problem for the economy. (For related reading, see
    Breaking Down The U.S. Budget Deficit.)
    The United States is increasingly a service-based economy. While the
    U.S. has the largest economy in the world, it is in third place in the
    value of its exports, behind China and Germany. Much has been made of
    the “hollowing out” of the U.S. manufacturing base, as companies have
    increasingly located manufacturing outside of the U.S. to take advantage
    of lower wages and costs. The U.S. is still a leader in technology,
    financial services and media, though, and the U.S. economy is
    increasingly dependent on these industries as a source of competitive
    advantage.
    Drivers of the U.S. Dollar
    There are numerous models and theories that attempt to predict
    currency exchange rates on the basis of relative interest rates, price
    levels, and so on. These models do not work especially well in practice,
    though, as traders consider numerous factors in their buy/sell
    decisions and the momentum of speculation itself can influence exchange
    rates. In other words, currency is like another “product” with extensive
    supply and price is determined by changes in demand. (For related
    reading, see 3 Factors That Drive The U.S. Dollar.)
    While demand for U.S. dollars is certainly influenced by its key
    role in global trade (trade counterparties need to buy or sell dollars
    to conduct business), the value of the dollar is also heavily influenced
    by economic data. Data that makes the U.S. economy look stronger can be
    positive for the dollar and vice versa, though some of this is tempered
    by inflation expectations (some growth is good, too much growth is
    dangerous). Accordingly, traders need to pay careful attention to the
    scheduled releases of economic data like GDP, trade balances, inflation
    and so on. This data comes out at regular intervals and traders can not
    only find these numbers freely on the internet, but also the consensus
    expectations for these numbers.
    In the time around 2011, the U.S. dollar was increasingly driven by
    concerns about the solvency of the U.S. and the government’s apparent
    inability to address persistent deficits and growing debt. Traders bid
    up the dollar, the Congress seemed serious about balanced budgets and
    debt reduction, but extensive spending and easy money policies to
    facilitate global military action and domestic economic stimulus
    weakened the dollar and fueled a bull market in gold. (For more, see
    Drastic Currency Changes: What’s The Cause?)
    The U.S. dollar is also uncommonly driven by global events, both
    good and bad. History has shown that the dollar tends to strengthen in
    times of global chaos, be that war, political instability or economic
    instability. Conversely, when global conditions appear more peaceful and
    sanguine, traders tend to focus even more intensely on the relative
    economic health of the United States and look for diversification away
    from the dollar.
    Unique Factors for the U.S. Dollar
    The unique position of the U.S. dollar as the world’s reserve
    currency cannot be ignored. The status of the dollar allows the U.S. to
    effectively export inflation, while also enjoying a lower interest rate
    on its debt. That absolves the U.S. of some of the consequences of its
    own decisions and allows the country to effectively “off-load” some
    responsibility. As other currencies become more popular as alternative
    reserve currencies, there is a risk of higher inflation and interest
    rates in the U.S., as well as a weaker demand for the dollar. (Discover
    how and why the U.S. dollar emerged as official currency in many foreign
    countries. For more, see The U.S. Dollar’s Unofficial Status as World
    Currency.)
    The U.S. dollar also holds a significant position in many other
    financial instruments. While trade between nations can be denominated in
    whatever currency is most convenient, many global markets are based
    upon the dollar, including gold, oil and many other commodities. The
    size of the U.S. financial markets also plays a role here; while other
    stock, option, commodity and bond markets outside the U.S. are growing,
    the size, liquidity, convenience and transparency of the U.S. markets
    make them attractive to global traders and buoy the role of the dollar
    in financial transactions. (For more, see How to Trade Currency and
    Commodity Correlations.)
    The Bottom Line
    Currency rates are notoriously difficult to predict, and most models
    seldom work for more than brief periods of time. While economics-based
    models are seldom useful to short-term traders, economic conditions do
    shape long-term trends.
    With the weakness in the euro unearthed by the sovereign debt crises
    of 2008-2011, the U.S. dollar again has a preeminent position as a
    reserve currency and safe haven. Given that it is extremely unlikely
    that any major economy will readopt a gold-based currency system or that
    the Chinese want the yuan to become a major trading currency in the
    forex market, the dollar seems likely to keep its prime spot as a
    trading currency and global default currency.
    That is not to say that it will continue to enjoy a rich valuation,
    though. The value of the dollar is going be determined by the economic
    health of the country and the ability of its government to address
    persistent deficits and growing national debt. That said, investors,
    speculators and traders should realize that the significance of the
    dollar divorces it from its intrinsic value and that perceptions of the
    dollar’s hegemony will influence value alongside economic
    considerations.

  • Pipbecile

    My eyes just exploded looking at that chart..