Critical Support

The most interesting chatter I heard pre-market this morning was, the dollar is breaking through critical support and we are headed dramatically lower. The dollar typically rallies in situations like this when there are masses rioting in the streets from Africa to the Middle East, the market has decided financial stability and preservation of capital is no longer as simple as saying "buy Treasuries." Quite a rational assumption if you ask me.

The reserve status has been weakened greatly, but relative to other major currencies, as displayed in the dollar index, it is undervalued. Could it dip all the way to 74, yes, but that looks like rock bottom at the moment. A short term move to the upside is likely. This of course is contrary to much of what I heard this morning. When speaking about a more lengthy timeframe, well, I would have to agree we are headed much lower.

This trend reversal has happened a few times in recent history (I will focus on two points) like I believe it is going to play out this week or two, as the USDX gains from here (moderately). I will focus on the last two occasions this reversal occurred in a similar. I have charted the DXYO weekly (available to everyone at freestockcharts.com) and I think this 76.40 level will become support as the momentum shifts.



The12-26 MACD had converged at lower levels on the two most recent occurrences of dramatic reversal. Of course the MACD did dip to -1.20 or below on the last occasions with RSI (14) dipping to 30 on both occasions. The next pivot point down from this level is 74.40, which is a long way considering how leveraged the typical FX participant is.

If this trend does continue downward it is an obvious signal more quantatative easing (QE) will be required to prop up the market. The second round of QE saved the dollar from almost this exact same level in November 2010. With no QE3 announced before QE2 is even over (June 2011), we could take out these key levels and head into no man's land. Even in the crash of 2008 the dollar held the 72 level as support. I suspect the Fed will continue giving the market a paper crutch until that mass of paper cannot hold the weight of the lumbering giant that is US economy.

MMMFTCMAHDS

Monetary Base

As the credit bubble continues to collapse the fed continues to expand the monetary base. This will not end well in the absence of an organic domestic recovery in the US. With the federal government providing deficit spending of over $3.00 per $1.00 in GDP growth, any recovery thus far has been generated exclusively by more public sector debt.