Dollar Index Rises On Run-To-Safety Fears

By Jim Donnelly, Olson Global Markets

Heightened military tensions between North and South Korea, renewed worries over the debt crisis in Europe along with continued concerns over the Fed’s QE2 policy helped the U.S. Dollar Index (DXY) find its footing and reverse higher over the past few weeks.

Technically, oversold conditions on weekly charts, along with a successful test of key trend line support at 75.65 also helped the dollar reverse higher. With plenty of upside room to go technically, it is worth noting that key trend line resistance on DXY does not come into play until the 86.75 area over the next few months.

A potential move up to that area, if it were to occur, would likely put a damper on this year’s commodity rally (at least in dollar terms) and curb near-term gains in equity prices. While renewed strength in the dollar index could benefit the greenback over the longer run, a near-term “risk off” investor stance could cause equities to retreat over the short-run, particularly with year-end window dressing and tax gain or loss strategies kicking in.

In any event, the dollar index is poised for a solid extension higher, which is likely to leave equity investors less bullish that they have been recently.

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