The world is not flat and all the global markets are interconnected. This should not be a surprise to anyone. The direction of the U.S. dollar has been very important to the movement of goods and services around the globe and I think it is very important in valuing securities.
There are many sophisticated fundamental and quantitative models out there, but I like to look at just a few price momentum tools. While many believe that our monetary policy, when compared to the policies in Europe and Asia, will keep the dollar bid, I on the hand look for the dollar to weaken in the weeks ahead.
In the daily bar chart of the U.S. dollar index (DXY), below, we can see that the DXY is above the 50-day moving average line but the slope of the line is turning flat. Notice how many times the 50-day line was tested last month?
We don't know the amount of trading in the DXY but look at the 12-day price momentum study right below the price chart. A pattern of lower momentum peaks can be seen from early May to now. The strength of rally has weakened since May. This is called a bearish divergence by technical analysts. A bearish divergence can be a leading indicator to a price reversal or a decline in this case. A close below 94 on the DXY could be the signal to precipitate further declines.
In this weekly bar chart of the DXY, below, we can see the trend-following Moving Average Convergence Divergence (MACD) oscillator. The two moving averages that make up this indicator have been narrowing and that typically precedes a crossing of the averages which would be a sell signal.
In this Point and Figure chart of the DXY, below, we can see a longer-term rise for the greenback but also a distribution (selling) pattern in recent months. I do not agree with the bearish target on this chart but I do agree with the suggested direction.
Bottom line: I do not pretend to be an expert in the foreign exchange markets. The fundamental case for a stronger U.S. dollar may be impressive but right now I see a market that has lost its upside momentum and could turn lower.