By Jim Donnelly, Olson Global Markets

After having already experienced a dramatic rebound from its lows, the U.S. Dollar Index (DXY) is in position to extend higher still. With technical studies bullishly aligned on long-term charts, the DXY is sitting just below key trend line resistance at 88.75. This set-up suggests that a “break” above 88.75 is a relatively good bet.

If it does, the “potential” for a move up to the “backside” of former support (now resistance) at 98 is a reasonable expectation to have. A wobbly Euro, a subdued British Pound and a depressed Yen are clearly the areas of weakness (in dollar terms) to focus on.

Of course, an extended rally in the dollar index (DXY) comes with a price to pay. Exports, in dollar terms, become less competitive with imports, possibly resulting in a drag on sales. Profit margins on domestic (U.S.) companies could become tighter, possibly resulting in limited net earnings expansion. And while inflation expectations would remain muted under this scenario, equity prices could well founder as investors look for additional signs of global growth.

In any event, the DXY does appear to be in position to make a new “leg” higher and could do so soon.

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By Jim Donnelly, Olson Global Markets

Financial unease triggered by soaring yields for Greek, Portuguese and Spanish debt along with worries over possible sovereign debt “contagion” sent the Euro sharply lower last week triggering a race to buy gold and the U.S. dollar. Civil unrest in Greece combined with a growing perception that the ECU is being run “by committee” added to an accelerated shift toward the greenback.

While the recent panic has not yet been quelled, measures announced on Friday by Eurozone’s financial leaders may help to do so. They plan to create a financial facility designed to defend the euro and create a pool of capital aimed at bringing down interest rates in its weaker sovereign economies. This may go a long way to help to reduce fears heading into this week’s trading sessions.

Technically, the U.S. Dollar Index (DXY) has soared and now appears to be aimed at a test of key trend line resistance at 86.50 while in an overbought condition on weekly charts. Due to the DXY’s recent inverse relationship to U.S. equity markets, it appears that while the dollar likely has a bit more upside ahead of it (before hitting resistance at 86.50), U.S. equity markets may experience further weakness near-term.

If resistance at 86.50 halts the upward path of the dollar index however, equity prices might once again find their footing and resume their move toward higher levels.

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By Jim Donnelly, Olson Global Markets

Although the S&P 500 Index broke slightly above key trend line resistance at 1,130 and the Dow Jones Industrial Average nudged a bit above key resistance at 10,660, neither index was capable of stoking up buyer momentum and extending much higher. On the contrary, shifting political winds and the recognition that the rally since March needed to take a breather resulted in a “sell into strength” approach instead. Although the BKX financial ETF continues to form what appears to be a bullish reverse Head & Shoulders pattern and with the Dow Jones Utility Index backing modestly away, but not far from key trend line resistance at 408, it might well be the DXY dollar index that more accurately frames the change in investor sentiment that currently has both commodity and equities prices turning lower.

No doubt, the political landscape changed quite a bit last week. A stunning senatorial upset in Massachusetts became a glaring piece of evidence that health care reform may be forced to take a different direction. Another unexpected development was the realization that the reconfirmation of Fed Chairman Ben Bernanke may be in jeopardy. Additionally, the rolls of Treasury Secretary Tim Geithner and the Director of the White House’s National Economic Council Larry Summers have become cloudy. Further, big banks have become politically targeted with the announcement of the “Volcker Plan” which is designed to restrict the size and activities of the largest U.S. financial institutions.

Internationally, Chinese banking authorities have instructed some of their major banks to halt lending activity during the rest of January after a burst of credit expansion occurred in the first couple of weeks on the New Year.

What has all of the done? At the very least, it has induced money flows into the U.S. dollar as well as into U.S. Government bonds which was evidenced by the U.S. Dollar Index (DXY) spiking higher and breaking above another form of trend line resistance at the 77.90 level. With many technical indicators on weekly charts positioned bullishly, the likelihood for further dollar strength appears assured. A modest Fibonacci 38% retracement targets a move up to the 80 level on the DXY. A 50% correction sits at 81.80. A more likely outcome, however, might be a 61.8% retracement up to the 83.70 area. Not only does that level represent a Fibonacci number as well, it would also fit the character of the “C” leg portion of a corrective A-B-C “zig-zag” pattern.

If this scenario plays out however, it will likely keep both commodity and equity prices on the defensive for a while longer.

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By Jim Donnelly, Olson Global Markets

While deemed one of the most “crowded” trades currently on investor’s books, the popularity of being short the U.S. dollar, or the dollar index (DXY) may have been tempered slightly following the news surrounding Dubai’s debt problems over the Thanksgiving holiday. With oversold conditions currently present, some observers have been on the alert for an exogenous event to possibly trigger a “run to safety” trade into the dollar and, in turn, causing a spirited “short-covering” greenback rally.

Worries over the exposure to Dubai’s debt that a number of global lenders have was just another reminder of the residual credit “risks” that could cause havoc in the global marketplace. An unexpected rally in the dollar, of course, would likely result in bearish corrections in both commodity and equity prices.

From a technical point-of-view, the dollar index (DXY) is edging ever closer to a cluster of support near the 73.50 area that should define its direction over the intermediate-term. Elliott-wave analysis alone, suggests that the bearish run in the dollar is likely approaching a conclusion.

With that said, a solid break below 73.50 on the DXY would be a troubling situation for central bankers and the balance of trade internationally. China’s currency remains largely pegged to the greenback which would make both U.S. and Chinese exports look more and more attractive to global consumers at the expense of European and Japanese products and services. That is another issue.

For the time being, key a close eye on the 73.50 level on the DXY.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Following an almost steady 7-month decline in value, the U.S. dollar index (DXY) is now approaching a key support area on daily charts while in an oversold condition.

Trend line support drawn off the lows of 2008 as well as a “cross” trend line support drawn off the highs of December 2007 and the lows of August 2008 and September 2008 both coincide at the 73.50 level on daily bar charts.

This support area should be of critical interest to both foreign exchange investors and global policy makers as well. A solid break/close below this area would likely send gold prices to new highs (in dollar terms) as well as kick start the CRB Index into a new swing higher.

In turn, foreign holders of U.S. debt may balk at adding to positions making it much more difficult for Treasury to issue low yielding debt, particularly at the longer end of the yield curve. Higher long-term interest rates, if they occur, would also have a negative influence on mortgage lending in an already challenging environment.

Support at 73.50, on the other hand, could catch dollar bears off guard in a market where there appear to be few dollar bulls. A crowded “dollar short” trade such as this one could result in a scramble to cover positions.

In any event, the level to focus on for the DXY dollar index is 73.50.

http://www.ogmarkets.com/