THE DOLLAR LOOKS OVERBOUGHT -- THE EURO IS OVERSOLD -- THE YEN IS RALLYING -- ALL GOOD FOR GOLD

THE DOLLAR IS TESTING 200-DAY AVERAGE... The Dollar Index has been rallying since June within the confines of a long-term downtrend. That rally may be about over. Chart 1 shows the Dollar Index (plotted through Thursday's close) starting to struggle at its 200-day moving average. In addition, the daily RSI and stochastic lines are in overbought territory. A large part of the dollar's increase has come at the expense of the Euro which is a mirror image of the dollar. Chart 2 shows that the Euro is bouncing today from a deeply oversold level and is trying to climb back over its 200-day average. That would also be consistent with a dollar top.

Chart 1

Chart 2

YEN HITS THREE-MONTH HIGH AGAINST THE DOLLAR... The Japanese yen has jumped to a new three-month high against the dollar. That puts the yen within striking distance of the highs reached during May. That's an important chart barrier. Chart 4 shows that the level around .86 has acted as a ceiling in the yen for the past three years. The main factor keeping the yen from rising further appears to be intervention by the Japanese central bank, which has spent a lot of money buying dollars to keep the yen from rising. Their reasoning is that a stronger yen hurts Japanese exports. The chart, however, shows that the yen bottomed at the start of 2002. It may be just a matter of time before market forces push the yen into a new uptrend. Foreign money flows into Asian markets, which are the strongest in the world at the moment, are exerting upward pressure on the yen. Over the long run, market forces usually win out which would result in a stronger yen and a weaker dollar. Charts 4 and 5 compare the long-term trend of both currencies and show that the bottom in the yen at the start of 2002 coincided with a top in the dollar. A short-term drop in the yen since May has helped boost the dollar. Any significant new strength in the yen could end the dollar's bounce. This week's upside breakout in gold (which is up another $6.00 today) also hints that the tide may be starting to turn against the dollar. Asians are big buyers of gold. Stronger Asian currencies make gold cheaper and a lot more attractive to Asian traders.

Chart 3

Chart 4

Chart 5