Charting Asia

Dollar Rebound? Wait At Least Another 10 Months

The Dollar Index chart provides some insights into the decline of the U.S. dollar, and ultimately its position as a global reserve currency.

The best historical view comes from the monthly chart. It shows the dollar has been locked in a substantial downtrend since 2002 when the Dollar Index fell from $1.20 to $0.81 before a rally to $0.91 followed by a fall to $0.71.

The monthly chart shows that  $0.81 is a critical support level. This support level was set in 1995 and retested again in early 2004. It provided a weak support level in 2007 September. The dollar index quickly fell to near $0.78 as the first shocks of the Global Financial crisis developed. The fall continued to create a low near $0.71.

The dollar index developed support near $0.71 in the middle part of 2008 before staging a rapid recovery and return to $0.88 in 2009 February. The old support and resistance level near $0.81 did not provide any barrier to the fast rise.

For the past nine months, the U.S. dollar has been in terminal decline towards the current level near $0.76. Again the historical support resistance level near $0.81 did not provide any support during the fall. There are no historical support level between $0.81 and $0.71. The Dollar Index shows a free fall market between these two levels. This suggests the dollar has a high probability of continuing to fall to the support region between $0.71 and $0.72.

The interesting feature of the market is the failure of historical support and the creation of a new, and as yet, untested support level near $0.71. 

This chart analysis delivers five bearish scenarios in the near term:

The first is that the dollar has a high probability of a continued fall towards $0.71 on the dollar index.

Second, the price of gold will continue to rise, and perhaps rise dramatically, as the dollar weakens.

Third, the rise of some currencies, such as the Australia dollar against the US dollar will continue.

Fourth, the rally may develop a trading consolidation band between $0.71 and $0.81.

Fifth, support at $0.71 is not guaranteed and the dollar could fall much further. Using trading band projection methods, the technical target is $0.61 after a failure of support near $0.71. The dollar Index under $0.71 exerts some significant changes on the balance of world economies.

However, long-term outlook for the greenback appears bullish, according to the chart.

The pattern of downtrends starting from the 2002 February high create a fan pattern. This type of fan pattern develops as a long term trend reversal pattern. The best example of this fan pattern is the Shanghai  Index. The fan pattern started from the 2008 January high gave a long term advance indication of the Shanghai market reversal. This fan pattern suggests the US dollar may be down at the moment, but it is not out. A rebound from support near $0.71 and a test of the downtrend line near $0.81 will confirm the fan pattern.


There is one small warning. Fan patterns are long term patterns. In the Shanghai Index the fan pattern was seen on a  daily chart. It took 10 months for the market reversal to develop. The fan pattern on the Dollar Index is on a monthly chart. The time frame for recovery for the US dollar is much longer than 10 months.  The US dollar has become a floating currency and many people have difficulty coming to terms with this development.

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