U.S. Dollar Index Positioned To Move Solidly Higher

By Jim Donnelly, Olson Global Markets

On the heels of a number of significant downgrades on European debt by Standard & Poor’s rating agency on Friday, the U.S. Dollar Index (DXY) appears to be in position for a possible test and likely break above key downtrend resistance currently sitting at the 82 level.

Although many investors had expected downgrades to occur, the impact of these downgrades along with the breakdown of talks between Greece and a number of creditors trying to negotiate a restructuring of its debt could propel the DXY even higher.

If the U.S. Dollar Index were to break above the 82 resistance level, a move up toward key resistance in the 87 area could ensue. In turn, a corresponding move could force yields on U.S. Treasury 10-year notes to move solidly lower and toward a key technical level sitting near 1.40%. Moreover, a likely “risk off” stance by investors could send the S&P 500 index (SPX) sharply lower as well.

If this scenario were to play out over the intermediate-term, a longer-term outlook on the DXY could envision an eventual move toward the 100 area, where the “backside” of former trend line support (now resistance) currently sits. The implications of such a move would carry overtones of a deflationary environment, a condition that Federal Reserve Chairman Ben Bernanke is trying to avoid. Thus, recent hints of another round of quantitative easing (QE) would likely be realized in theU.S.along with additional attempts by the ECB to stoke stimulus inEurope.

http://www.ogmarkets.com/

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