More Dollar Weakness Likely In Coming Months

By Jim Donnelly, Olson Global Markets

When looking at the long-term chart of the U.S Dollar Index (DXY), it appears likely that more dollar weakness is likely to unfold in coming months. Monthly stochastic studies, RSI (Relative Strength Index) and MACD (Moving Average Convergence/ Divergence) indications are all declining bearishly and are not in oversold conditions. This technical set-up favors a slide in the greenback with a possible target of 74.40, which is where two separate trend lines converge.

If this scenario were to play out as outlined, the economic backdrop would likely be a continuation of sluggish growth and tepid employment gains over the near-term highlighted by a low interest rate policy by the Federal Reserve.  Nevertheless, a weaker dollar in time could also give a competitive edge to U.S. goods and services, and would likely be a plus for equity markets as well as commodity prices and basic materials production.

In due course, a weaker dollar could also result in an expansion of domestic growth, a stronger real estate market, an expansion in job gains and a likely lift for the emerging markets whose credit spreads would likely compress somewhat against U.S. interest rates.

This scenario could be altered, however, if domestic political squabbles were to take an even darker turn in coming months, or an unexpected geopolitical event were to develop and redirect vital resources for period of time. Those concerns are difficult to predict by definition, but could emerge nevertheless.

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