US$ downtrend to resume shortly

Here is an extract from commentary that was posted at www.speculative-investor.com on 27th October 2002. 

Below is a weekly chart of the Dollar Index. The Dollar experienced a large decline during the first 7 months of this year and has since been drifting higher in what looks like a counter-trend consolidation.

The Dollar Index is presently about mid way between critical support defined by the July-2002 low (around 103.50) and critical resistance defined by the September-2001 low (around 111). Our view, over the past 3 months, has been that the Dollar Index would move up to the 111-112 range before commencing the next downward leg in its bear market. Also, based on cyclical patterns weíve thought that additional major downside in the Dollar would probably be delayed until the first quarter of next year. We are now going to make a couple of adjustments to these views.

First, rather than look for a rally to 111-112 over the coming 2 months, we will re-state our short-term view as follows: The Dollar Index will not achieve a weekly close above 111. We are making this change because the Dollar Index has completely worked-off an 'oversold' condition over the past 3 months, yet it is now only about 3% above its July low. It is a sign of weakness that such a large decline would be followed by such a feeble bounce. Also, the importance of the resistance at around 111 is such that a decisive close above this resistance would call into question our medium-term bearish view on the Dollar.

Second, there are good reasons to expect that normal seasonal forces will not 'work' this year. One of these seasonal forces is the tendency for the stock market to perform well between the months of November and April. However, this seasonal tendency has been determined primarily by looking at what happened when the investment environment was totally different from today's environment. If we look at what happened during comparable investment environments the same seasonal pattern does not emerge. For example, the following periods were lousy times to be heavily invested in the stock market:

Nov-1930 to Apr-1931
Nov-1931 to Apr-1932
Nov-1932 to Apr-1933
Nov-2000 to Apr-2001

The period from Nov-2001 to Apr-2002 was a reasonable, although certainly not great, time to be invested, but this was because there was a major selling climax in September of 2001. This year there has been no such climax and, therefore, the stock market has considerable downside risk over the next several months.

Since there is a good chance that the stock market is not going to follow the normal seasonal pattern this year and since the US$ is positively correlated with the US stock market, it is not much of a stretch to conclude that the Dollar's typical 4th quarter strength might be absent this year. We therefore won't be relying on the Dollar's normal seasonal pattern to delay the start of the next downward leg in its bear market.

The US$ made its long-term peak against both the SF and the euro on 26th October 2000, so we have just had the 2-year anniversary of this milestone. This 2-year anniversary won't be especially significant unless the Dollar immediately starts to show signs of weakness. A daily close below 107 would be such a sign and would suggest that the Dollar was about to move quickly down to its July low. A break below the July low would indicate that the Dollar Index was on its way to our medium-term target of 90.

Regular financial market forecasts and
analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html
One-month free trial available.