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Louise Yamada, CMT Ronald F. Daino, CMT Jonathan T. Lin, CMT, CFA
louise.yamada@lyadvisors.com ron.daino@lyadvisors.com jonathan.lin@lyadvisors.com
Lori Altenburger Noreen Lennon
lori.altenburger@lyadvisors.com noreen.lennon@lyadvisors.com
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SPECIAL FEATURE: Long Shadows on the U.S. Dollar – Poised to Test / Break A 28-
Year Support Into “Uncharted Waters?”
The weakness in the U.S. Dollar index (DXY-85.75) over the past several weeks has caused us to
review our longer-term view of the dollar from a technical perspective (see Figure 2).
Figure 2. Dow Jones Industrial Average & U.S. Dollar Index
The U.S. dollar has essentially fluctuated in a 19-year trading range between a level of 80 and 100-105,
with a brief breakout into 2002 (see Figure 2). From 2002, the dollar experienced a steady decline into
2005 and, in the process, violated an eight-year uptrend and retreated to test the trading range support
at 80. A hiatus to the dollar decline occurred from 2005 to 2006. But now, the dollar once again has
lost its upward momentum, as my colleague, Ron Daino, has noted herein over recent weeks, with a
further break this week (see Currencies below).
The dollar’s critical support level at 80 extends as far back as even 1978, or 28 years (based on the
U.S. Trade-Weighted Dollar in Figure 3). It is this support level that concerns us now because,
technically, the longer a given level (support, resistance or trendline) has been in place, the more
technically significant that level becomes. Any violation thereof is considered a more serious technical
event fraught with potential for greater risk (or potential for greater reward); in this case, greater
depreciation risk. We are particularly concerned with this 80 level in light of the other major structural
20-plus year trend reversals that have taken place over the past six years (see Technical Perspectives
dated April 11, 2006).
These observations are based on the Federal Reserve Trade-Weighted Dollar (see Figure 3). The
major currency index is a weighted average of the foreign exchange values of the U.S. dollar against a
subset of currencies of its major trading partners. The heaviest weight in the index is from the Euro
area, followed by Canada, Japan, the U.K., Switzerland, Australia and Sweden.
There is also the Fed’s trade-weighted dollar (the broad index), inclusive of all world currencies,
including several currencies (with China) pegged to the U.S. dollar. As can be seen in Figure 4, the
Broad Dollar Index has already violated a 23-year structural uptrend and has broken down
through a seven-year top (support). Today’s action puts in place a new reaction low. These
structural breaks act as a prelude to the technically anticipated support break in the other dollar
measures.
• Venezuela mandated that royalties for oil must be paid in oil, not dollars;
• The growing bias on the part of other countries not to accept dollars for oil, requiring Euros
instead;
• Iran may be creating an oil bourse in both Euros and dollars;
• The Saudi’s recent decision to charge the U.S. more for oil than what they charge the United
Kingdom or Asia;
• Central banks are shedding excess dollars, euphemistically under the guise that other
currencies are “underrepresented in their global currency reserves” (Sweden, Quatar, UAE and
other Middle Eastern countries, as examples, with Russia and China to follow suit, “diversifying”
national reserves, by replacing dollars with Euros;
• Developing nations that have held dollar reserves as insurance may now find better investments
elsewhere as those reserves depreciate;
• Central banks are no longer selling, some even buying, gold (Quatar and China as examples) to
eliminate excess dollar reserves;
• The result had been seen in a drying up of demand for our government debt;
• The Saudi news services advising caution about investing in the U.S.;
• Papua wants to nationalize their ores;
• Bolivia has just nationalized its natural gas; and
• Zimbabwe seeks to take control of foreign run gold mines.
The generally accepted view of the U.S. as the engine of the world (that if our economy slows,
so goes the world) may be a major error of analysis today:
• The U.S. is now responsible for only half of the global GNP, no longer a majority.
• Exports to China from Korea and Japan are larger than to the U.S. (growing their economies).
• Europe is exporting more to China than we are.
• Alliances and trade agreements between Russia and China, Russia and Iran, Saudi Arabia and
China, Canada and China as examples are cropping up, exclusive of the U.S. and its interests.
IMPORTANT DISCLOSURES
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