Is the US dollar Finished?

Is the dollar about to collapse? We’ll know soon enough, since the U.S. Dollar Index fell yesterday to within a hair of an important correction target that we flagged for subscribers a couple of weeks ago. The actual target was 83.45, a Hidden Pivot support that lay just 0.05 points beneath yesterday’s actual low. We’d expected a bounce from our target, and it came in the form of a sharp rally of 0.81 points off the intraday low at 83.50. However, the surge would need to continue to at least 85.29 by Wednesday’s close to confirm a bullish reversal of the downtrend that has dominated since April 20. On that day, the corrective rally of an even larger downtrend topped at 86.82

Putting the dry technical details aside, these numbers are important because they imply that the dollar is hovering at the edge of a cliff. Indeed, if the 83.45 support were to fail decisively, it would signal more downside over the near term to at least 80.05. A five percent decline may not sound like much, but there’s a strong case to be made that any slippage below 84 will be the beginning of the end for the dollar. If so, we could expect a collapse in Treasury paper that would instantly devastate The Government’s already doomed plan to resuscitate the economy by holding lending rates down across the yield curve.

Bond Gains Erased

Treasury rates have surged since mid-March, when the Fed announced it would start monetizing debt via direct purchases of Treasury debt. Bond prices staged their biggest rally ever on that day, pushing yields down to their lowest level in many decades. However, any benefits thereof have been erased, since the slippage in bond prices since then has pushed yields above where they were when the monetization scheme was announced. Now, if the Dollar Index were to settle for two consecutive days below 83.45, we would infer the worst. A reprieve would be signaled by a thrust to 85.29, the number mentioned above, but if it doesn’t happen soon, we could probably kiss the dollar good-bye. Looking at a bigger picture, it would take a print at 91.17 - roughly eight percent above these levels - to signal a likely end to the bear market begun in early 2002 from 120.51.
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