The Dollar Move - A Look at Key Foreign Currencies

As a follow up to this morning's gold message, we thought it would be good to forecast the rest of the dollar's move, based on the dollar index's constituent currency makeup.

Looking at yesterday's dollar close, we can already see signs that this move may be about over.  As has occurred in the past with regular repetition, the dollar frequently makes rounded tops.  It appears we're getting one now, with confirmation on the RSI and overbought conditions on the slow stochastic.  Worst case, we'd look to the 150 day moving average as a ceiling.  But that leaves the question, how much further is this rally likely to go?

The euro, yen, pound, and loonie together make up 92% of the US dollar index.  These four currencies, notably the euro and pound, should provide additional visibility into the dollar rise and probable limits.

 The euro will likely move down a bit lower, toward its 150 day moving average--around 1.45 (where we showed support before)--where it has strong support.  That's roughly a 1% down move from here.

The strong support for the yen will likely coincide with the uptrend that's been in place since April.  That's roughly a 2.6% move down from here.

The pound is an interesting case in that it is very, very close to support here.  This is the worst of a bad lot of fiat currencies and is likely ready for a rally with a *potential* inverse head and shoulders pattern on the charts.  It is oversold and appears to be turning around here.  Watch the neckline...

For all intents and purposes, the pound's short-to-intermediate term downside is over for now.

Finally, we have the Canadian dollar (loonie).  The chart is showing a fairly well formed symmetrical triangle that, if it were to break to the upside, would have a target of around $USD 1.01.  It is right at a strong support level, and given that the Canadian dollar is a commodity currency, we believe that gold will either break up or down and the loonie will follow.  The period of indecision is quite obvious on this chart as the symmetrical triangle is almost perfectly formed.  This chart tells us little about the potential dollar direction since the loonie can break either up or down.

Thus, only the euro and yen can provide likely direction for the dollar.

This is the makeup of the US dollar index.  Between the euro and yen, 71.2% of the dollar index direction is determined.  Assuming everything stood still except the yen and euro, the US dollar index is likely to rise approximately .9% from here as the euro and yen reach their target ranges.  That's a target number of around 76.7 on the US dollar index.  76.82 was a previous point of resistance, and thus we believe that line will probably hold--especially with the loonie (and Swiss franc, by way of having gold backing, its very much in the same position) likely to be a follower of the gold price and the pound beginning to rise.  Intraday, we've gotten close to that mark.  The implication is that there's probably a bit more upside in the US dollar (though it's marginal), and by proxy, a bit more downside in gold.  At this stage, we're expecting 1100 on the gold price to hold (or, more accurately, the 150 day moving average will hold) with a possible overshoot to the downside of 1070.  We're not going to hold our collective breath on 1070, however.  If it gets there, consider it a gift.