Zak Mir on Dollar Dominance

As can be seen from the weekly chart of the Dollar Index below, the big push for the greenback versus a basket of leading currencies came from September last year with the break of 2013 resistance at 85. This was tested as new support shortly after in the form of a mid move consolidation / bull flag.

But it is evident that since then it has been essentially a one way market. The fundamental driver at least in the first instance was the prospect of the end of tapering of QE by the Federal Reserve. However, one wonders whether other factors are at play. In particular, events in Russia / Ukraine.

We have been made aware that over the past couple of years there has been a massive capital flight out of Russia as President Vladimir Putin exerts old Soviet style nationalism. While this may have worked well for the likes of Brezhnev during the height of the Cold War in the 1960s and 1970s, at that time the USSR did not have the kind of capitalist base to its economy it does now.

In fact, apart from building a nuclear arsenal and a large army there was not much else going in, especially in terms of business dealings with the outside world. No doubt the plunging Ruble, which only partially regained its composure after the 17% interest rate move last month, will continue to be the driver for wealthy Russians to send their money abroad.

Dollar Index

However, we are led to believe that the main reason the U.S. Dollar is strong, apart from being the currency of one of the less ugly economies in the West, is that we are at the point in the cycle where interest rates are set to go up. I have to admit though, I am not sure how likely / how much the Federal Reserve and dove Janet Yellen will move on interest rates, if at all.

The problem that the Fed Chair has is that every time it seems set to press the button on more expensive money, either the stock market takes a dive, or a turmoil inducing event such as the crude oil price crash intervenes. We shall see how long into 2015 it will be before Yellen breaks her duck on record low rates.

In the meantime it may be wise to at least try and divine a little on what may happen to major crosses over the first quarter of the New Year. As can be seen from the weekly chart of the Dollar Index above, the top of the price channel from 2010 is through 100, a target which is valid at least while there is no weekly close back below the 10 week moving average currently at 89.32.

Euro

This 100 target does of course hint that the breakdown for Sterling and the Euro since the start of the autumn is set to continue. The weekly chart of the single currency allows us to draw a support line projection from 2008 which is currently pointing as low $1.05 as a worst case scenario target within the 7 year descending price channel.

Cable

Not that followers of Sterling / Dollar have any reason to be smug either. It would appear that at least some of the uncertainty associated with the May General Election is rubbing off on Cable. On this basis one can say that the sell off which began ahead of the Scottish Referendum appears set to continue, or even accelerate.

The likely technical target over the next 2-3 months, or perhaps much less, is a support line projection which can be drawn from the latter part of 2010. This is heading for $1.45. However, there may be quite a few technical traders who argue that the set up post financial crisis simply calls for a retest of the sub $1.40 2009 floor, even though near term this cross is deeply oversold with a RSI under 20.