Dollar Update & Long Term Trend Projections For The USD

Dollar: Rumble or Crumble?

By nature, man hates change; seldom will he quit his old home till it has fallen around his ears. Thomas Carlyle, 1795-1881, Scottish Philosopher, Author

Aug 24, 2024

This Update will examine what is going on with the dollar. Where it is headed and what to expect in the future. So, without ado, let’s hit the road jack, as the saying goes.

After putting in a series of new highs, the rapid breakdown of the dollar illustrates what lies in store for it in the years to come. However, some relief rally is expected in the interim as the dollar has mounted a very hard correction in a relatively short period.

The 2-year chart above reveals that the dollar is close to hitting a strong support zone that falls in the 75.00-75.50 range. A test of this zone should lead to a bounce that can potentially take the dollar to the 80-82 range.

Dollar Vs Major Currencies

Let’s look at some of the currencies via their corresponding ETFs to see how they are holding up.

The Pound traded to 170, ran into resistance, and has since pulled back. It could potentially trade down to the 145-150 ranges before mounting another rally.

The Yen is also fast approaching a zone that offers strong resistance (114.40-114.61). If it tests this zone again and breaks down, it will have put in a triple top formation, which normally always leads to very strong correction.

FXC has just traded above a zone of strong resistance, and a failure to hold above this level will result in a pullback to the 87-87 range. Given the intensity of the current rally, there is a strong possibility that this breakout will fail and lead to a pullback.

It has experienced a brutal correction in a rather short period of time. It is trading at a new 52-week low and is very close to testing its 2-year lows. However, note that it is now very close to testing a very strong zone of support, and as it is extremely oversold, there is a fairly strong chance that it will mount some rally soon.

This dollar-bearish ETF is fast approaching a zone of strong resistance (28.50-29.00). UUP has generated several negative divergence signals, and it is now trading in extremely overbought, hence the odds favour a correction.

Dollar Update: Everyone is Turning Bearish

Nearly everyone is bearish on the dollar, so this is a bullish development from a contrarian perspective, as the majority are nearly always wrong.

A lower dollar makes exports cheaper and imports more expensive; this is not what most nations want right now, especially as the U.S. consumer is cutting back and most economies are fragile.

Finally, from a mass psychology perspective, the following article indicates that we are at a turning point, for whenever the press starts to comment on something, a trend change is normally in the works.

Over the last three months, banks put 63 per cent of their new cash into euros and yen — not the greenbacks — a nearly complete reversal of the dollar’s onetime dominance for reserves, according to Barclays Capital. The dollar’s share of new cash in the central banks was down to 37 per cent — compared with two-thirds a decade ago. Full story

Dollar Update: What’s the Outlook Going Forward

We are not long-term dollar bulls, but we feel that the dollar is due for a relief rally as it has mounted a very strong correction in a relatively short period. We felt the same way from late 2007 to early 2008 and went on record to state that the dollar would mount a very strong rally that would catch the majority with their trousers down.

Additionally, after studying the charts of several currencies, we find that most are fast-approaching strong zones of resistance, which should lead to correction before the next leg up. As the dollar has been hammered so viciously, it would not be wise to open up new bets against it. The most prudent move would be to wait for a rally before placing new bets against it, and if you are willing to take a bit of a risk, you might even consider opening up long positions in the Dollar and/or short positions in the Euro.

Our long-term view is that the dollar is in trouble, and it could potentially shed an additional 60% of its value in the coming years, but for now, the outlook is still bullish. We do not fight the trend. The trend is your friend; everything else is your foe.

if we begin with certainties, we shall end in doubts, but if we begin with doubts and are patient with them, we shall end in certainties. Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman