Tuesday, February 3, 2015

US dollar is at extreme levels | Looking for a catalyst for reversal

Since the middle of last year the US dollar has been on a tear against all its major counterparts. The chart above shows the US dollar index, which is its value against a basket of the other major global currencies. Technical Analysis (TA) of the Moving Average Convergence Divergence (MACD) indicator (lower graph) indicates that the Greenback is seriously overbought, to use the TA parlance.

Recent movement of the US unit has been such that there are indications of exhaustion buying. This occurs when market participants who are late to the party, who feel that they might have missed a boat of some sort, pile into the instrument in question in an indiscriminate manner. This is almost always followed by a collapse.

Looking for a catalyst

A trigger of some sort will be needed for such a reversal, were it to occur. The most likely candidate for this is an indication by the Federal Reserve that core interest rate rises are further into the future than has been the case. Recent cuts in interest rates and other easing measures by others, of whom Australia is only the most recent, and a fear that the rampant US dollar would be bad for the US economy, would bear on the Fed’s thinking in this matter.

There are other signs that something of a turn in the US dollar might be in the offing. All commodities, and most importantly oil, are priced in US dollars. In the last day of so there has been a firming in the price of oil and such hard commodities as copper. Commodity prices and US dollar rates are inversely correlated. When one goes down, the other tends to go up.

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