OVERSOLD DOLLAR DUE FOR A BOUNCE

SHORT-TERM TREND STRENGTHENING... Chart 1 shows the U.S. Dollar Index stabilizing. The 14-day RSI line has risen above 30 for the first time in more than a month. The daily stochastic and MACD lines have also turned positive from oversold territory. We take this as a sign that the downtrend in the dollar has gone too far -- and that the greenback is due for a counter-trend rally. The fact that it's in the low 90s also carries some significance since that puts the dollar near a major support level.

Chart 1

DOLLAR NEARS MAJOR SUPPORT... The monthly chart of the Dollar Index shows it close to major support just above 90, which was the low formed during the second half of 1998. The RSI and stochastic lines are also in deeply oversold territory. We wouldn't be at all surprised to see the dollar try to make a stand in this area. The major trend in the dollar, however, is still down as reflected in the negative MACD lines. The catalyst in a dollar bounce could come from the Europeans who are meeting this week and are expected to lower short-term rates. That could cause profit-taking in the Euro and give a bounce to the dollar. That could also be positive for bonds and stocks. It may, however, cause some profit-taking in gold and gold stocks. We view any potential moves in the dollar (and gold), however, as short-term corrections -- not major trend reversals.

Chart 2