LONDON (SHARECAST) - The performance of the US dollar over the past few weeks has been choppy to say the least and has come under increasing pressure as stock markets and commodity prices have risen around the world.
The US dollar index can be a good indicator to future US dollar direction and it is currently on the cusp of a key support area.
In March this year the US dollar index was trading up at 89.50 and since then as stock markets have risen, the dollar has fallen to be approaching its June 2009 and December 2008 lows.
What is also significant about these lows is that they are also equivalent to a 61.8% retracement of the rally from its all-time lows at 70.70 in March 2008, to its highs this year at 89.50, so the importance of them cannot be underestimated.
To break out of this downward spiral the index needs to break out of its downward channel, as indicated by the channel lines at 80.83 and 75.12.
The support zone between 77.85 and 78.30 also translates into very important levels on the EURUSD FX rate. There is significant resistance between 1.4290 and 1.4340. This is because the Euro makes up over 55% of the overall weighting of the US dollar index, which means that there is a close correlation between these two assets.
Both rising crude oil and commodity prices has further contrived to undermine the US dollar with US crude oil just offs its highs at $73.20, for the last 3 month. Copper and Aluminium which are priced in dollars, have also posted significant gains as well as new short term highs in the past 3 months.
If these support levels hold on the US dollar index then expect to see profit-taking in equity markets, and for EURUSD to drift away from the 1.4300 area back towards 1.4000.
If these support levels break then we can expect to see further US dollar weakness, and further rises in equity and commodity markets.
