The strength or weakness of the U.S. dollar is influenced by four features. The first feature is the latest round of quantitative easing in the United Sates. The second feature is the inadequate solution to the "fiscal cliff" issue made at the end of December. A solution was achieved but many people believe the solution is only temporary and that it will lead to a U.S. recession. The third feature is the debate about lifting the U.S. debt ceiling. This requires a decision before the end of February. The fourth feature is the potential for more ratings agencies to downgrade the U.S. to double A rating.
These four features contribute to weakness in the U.S. Dollar Index. The index is a basket of currencies comprising the euro, the Japanese yen, the British pound, the Canadian dollar, the Swiss franc and the Swedish krona. The dollar index is used as a measure of the strength or weakness of the U.S. dollar.
(Read More: Picture This: The dollar at 100 Yen)
There are three significant features on the weekly dollar index chart. The first feature is the uptrend line that started in September 2011. One year later, in September 2012, the dollar index fell below this uptrend line. The weekly close below this uptrend line was the first signal of a significant change in the trend direction. This showed weakness in the uptrend, but it did not help traders to set long term downside targets.
The second significant feature is the support level near 79.5. This provided both support and resistance in 2011 and 2012. The fall below the trend line used 79.5 as a support level. Consolidation behavior developed at this level and this included a small rebound rally to resistance near 81.5. The pattern of rally and retreat is the third part of the next significant feature on the chart.
The third significant feature is the development of a head and shoulder uptrend reversal pattern. The left shoulder developed in January 2012. The head developed in July 2012. The right shoulder developed in November 2012. The neckline of the pattern connects the March 2012 low and the September 2012 low. The value of the neckline is currently near support near 79.5.
The head and shoulder pattern is confirmed with a sustained move below support near 79.5. A fall below this level has a downside target near 74.5. This target is calculated by measuring the distance between the neckline of the head and shoulder pattern and the top of the pattern.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests..
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