The smoke from the protests in Greece have diverted attention from wider debt problems and given an unexpected boost to the value of the US dollar. From a fundamental perspective there was high probability the weakness in the US dollar would continue.
Fundamental factors included the talk of a technical default in the United States, a weakening Dow index, and insipid economy and the very low possibility of a new round of quantitative easing. All of these factors in previous weeks had weighted heavily on the US dollar index driving it towards 73.50.
The confusion around the Greek debt crisis has over-ridden these US concerns and the US dollar index has peaked above 76.0 before settling into a new trading band between 74.50 and 76.0.
Is this a sustainable recovery, which will lead to a new uptrend in the US Dollar index, or is this a temporary consolidation prior to a continuation of the downtrend in the US dollar index? This is the key question for traders and investors.
The US dollar index is a basket of currencies. They are the Euro, Japanese yen, Great BritainPound, Canadian dollar, Swiss Franc and Swedish Krona.
Many of these currencies are weak currencies so the fall of the US dollar in terms of this basket shows even greater underlying weakness.
The downtrend line starts with the Dollar index high of 88.50 in 2010 June and uses the high near 81.5 in 2011 January as the second anchor point for the line. The high of 76.40 in 2011 May and again in June confirm the position of the down trend line.
The US dollar index must be able to close above the value of the downtrend line on the weekly chart before a new uptrend breakout is confirmed. The current trend line value is near 0.758. A breakout has the first upside target near 79.50. This is the lower edge of a trading consolidation band that is between 79.50 and 81.50.
This has been a strong consolidation area in early 2010 and in early 2011. This level has a high probability of again providing resistance for any new uptrend in the dollar index.
The current resistance level near 76.20 is weak. It is a temporary feature of the market. A move above the value of the downtrend line will quickly overcome this weak resistance at 76.20.
A retreat from the downtrend line will quickly lead to a retest of the support level near 74.50. A failure of support sees a continuation of the long-term downtrend with the next support level near 71.50.
In the short term there is increasing probability of a rebound in the US dollar index but it has a low probability of moving above 79.50. The long-term fundamental factors contributing to US dollar weakness have not disappeared, so long-term downward pressure remains.
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 CNBC's Asia 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.
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