U.S. Dollar Officially “Turns South”, And Euro To Benefit

Today, as I was scanning through my charts, I noticed that the U.S. Dollar Index traded through its uptrend line and has now closed below it. Take a look at the chart below.

The Dollar broadly breaks its Uptrend!

Why would this be happening now? In the past week, we’ve had the G-7, Bernanke and Volcker all come out and basically say that the worst is behind us.

On top of this, the “fear gauges” VIX, TED spread, LIBOR rate, etc., all point to the same thing. Fear is diminishing as markets stabilize. Therefore, there’s no incentive to stay in the defensive play of the greenback.

Also, commodities have stabilized and risen lately. For instance, oil is no longer at its $33 low but now it’s holding around $55 a barrel.

Coast is Clear…time to Flee the Dollar!

So now that the “coast is clear” for the most part, traders are starting to inch back into foreign currencies that have had a history of higher yields. While many of these currencies aren’t “high yielding” now, they will be the first to be this way once the first wave of inflation returns (and traders know it). Therefore, they are positioning themselves ahead of the wave, like a surfer.

Who’s the obvious beneficiary of this USD Index Breakdown?

As you can see from the chart, the U.S. Dollar Index is weighted heavily in the euro (57.6%).

Therefore, when this index breaks, the first place we should look to is the EUR/USD pair. This is the first obvious beneficiary of “dollar weakness”.

So take a look at the chart below and you will see what I’m talking about.

You will notice from the chart below that the EUR/USD is breaking higher even with its interest rate announcement just around the corner (on Thursday) as rates are expected to go from 1.25% down to 1.00%.

EUR/USD breaks higher as the U.S. Dollar Index breaks its Uptrend!

I think we could see some consolidation above the breakout while the market awaits the ECB’s rate decision. However, once that “unknown” is behind the market, I see the EUR/USD heading higher out of this 6 month consolidation!

Once we get past the rate announcement and Trichet’s press conference, then the EUR/USD will be free to head higher overall.

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