Currency Analysis – Dollar vs. Euro

With currency volatility expected to be a huge issue in 2012, I wanted to quickly highlight a clear technical pattern that has formed in both the Dollar Index and Euro charts, which may signal an imminent reversal of recent trends. As you can see in the chart below, the Dollar Index (DXY) is currently facing a bearish “double-top” technical formation, while the Euro (which trades inversely to the DXY due to the fact it makes up nearly 60% of the index) is showing signs of a “double-bottom.”

The attention in recent months has clearly been on the European debt crisis, and although the Euro has dropped over 10% since its recent peak earlier this year, it has actually held up fairly well, managing to stay above $1.30. Historically, the Dollar should have performed much better in such an environment overseas, as the reserve currency has typically experienced “flight to quality/safety” benefits.

The Dollar Index, however, looks to have put in a classic two month “double-top.” A “double-top” pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Based on the concerns overseas, the market should have expected the Dollar Index to move even higher, but this failure to break through this key resistance level makes for an ominous technical sign ahead.

Investors and market participants are well aware that the present concerns and dangers facingEuropeare as much as reality here at home. With soaring debts and deficits sparking renewed deflationary fears, central banks around the world are being provoked into continuing money printing/injecting liquidity into the global banking system.

More money printing, or QE – Quantitative Easing (in addition to the bearish technical pattern) would almost guarantee a sharp drop in the Dollar Index, and a return to the rally in Dollar denominated assets such as gold, commodities, and equities. If the “double-top” technical pattern continues (i.e. the DXY breaks down convincingly below support at 74), then we can expect the dollar to re-test the 72 level.

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