Trading Nation

This chart shows why the dollar is in trouble

Trading Nation: The Fed & the dollar trade
Stacey Gilbert trades Chinese stocks

The American dollar had an incredible run for nearly a year before it began to falter a month or so ago. Now one technical strategist sees the recent slide as just the beginning of the dollar's decline.

The U.S. dollar index tested a 12-year high in March when it peaked at 100.39. That capped off a year-long 26 percent rally in the greenback.

But in the last month and a half, the buck has tanked 4 percent versus a basket of other major currencies. And Richard Ross, head of technical analysis at Evercord ISI, says the technicals are showing grim prospects for the dollar.

"The single biggest consensus trade—that long dollar trade of the first quarter—is poised to unwind further, and lower levels are ahead for the dollar index," he warns.

A board shows U.S. dollar exchange rates in Rio de Janeiro.
Sergio Moraes | Reuters

Since its March top, the dollar index has made a bearish double top pattern. Worse, the second of the two tops, which occurred in the first half of April, failed even to trade above the 100 level in the index. According to Ross, the pattern was confirmed when the dollar broke below the 96 level. "That has generated a confirmed sell signal," he said.

The double top pattern may also provide a guide to where the index may ultimately land. "Measure the height of the pattern, which in this case is roughly 4 points, or 96 to 100," explained Ross. "Project down from that 96 break point. That brings us down to 92, which also happens to coincide with the 150-day moving average."

Before it gets there, however, Ross expects some support at the 100-day moving average, currently around 94.64. That is close to where the dollar traded on Wednesday only to bounce after the Fed released its meeting notes.

For Ross, the index is headed south for the summer and that will mean prices on commodities will rise with the cheaper dollar.

"The horse has left the barn here in terms of the dollar," Ross said. "I see further weakness for the greenback and commensurate strength in the euro. And, of course, the bullish read-through here is for commodities like crude oil. Continue to buy crude and continue to sell the dollar."

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