Update on US Dollar: May 1, 2017

In our last update on the US dollar [see: Mar 27 Update] I noted that it had reached our previous target at an important Fib level and two important trend lines.  The only thing it hadn’t tagged was the 200-day moving average, which would have meant dropping through all that other important support.

DX reached the yellow TL and the .618 Fib lines — arguably our most important downside targets.  The one mystery is the SMA200, currently at 98.447.  Note that DX reached it back on Nov 9 (aftermath of election day) and got a very sharp bounce.  I wouldn’t be surprised to see another such sharp plunge and recovery sometime in the next few days.  Though, the bulls would probably rather it wait until the SMA200 has reached 98.901 so there aren’t any Fib-related mishaps.  If so, that might not be for another few weeks.

It will come as no surprise to regular readers that the bulls got their way.  DX bottomed that day, then bounced for several weeks until the SMA200 had finished climbing to that key Fib at 98.901.  It tagged it on Apr 24 and has been going sideways ever since. We’ve talked in the past about how the Fed has a love-hate relationship with the dollar.  As a net importer, the US needs a strong dollar in order to avoid inflation.  And, a strong dollar usually supports strong stock prices.

By offering yields that are much higher than Japan and the eurozone, it hasn’t been all that difficult to attract capital.  And, that’s where the “hate” side of the equation comes in.  The US needs higher interest rates like a fish needs a bicycle.  If it can’t balance its budget with the 10-yr at 2%, how in the world will it manage at 3-6%?

It must have unnerved the FOMC when the dollar slipped lower following the Mar 15 rate increase.  Plenty of jawboning later, they got their bounce on Mar 27.  But, we’re right back at those lows — meaning investors don’t especially believe the FOMC’s narrative regarding additional hikes this year.

We’ll take a look at what the charts say.  For the past several years, they’ve been much more accurate than all those Fed press conferences put together.

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