EXPECTATIONS FOR ECONOMIC SLOWING AND FALLING US RATES PUSH DOLLAR SHARPLY LOWER -- THE EURO IS NEARING ITS 2006 HIGH AS OTHER CURRENCIES JUMP -- PROFUNDS FALLING DOLLAR FUND RISES WHEN THE DOLLAR FALLS
FOREIGN CURRENCIES SURGE AGAINST WEAK DOLLAR ... A government report predicting a slower American economy in the first half of next year is having a bearish impact on the U.S. Dollar and a bullish impact on foreign currencies. Chart 1 shows the Euro moving up to challenge its 2006 highs. The Japanese yen (which has been one of the world's weakest currencies) is one of the day's strongest. Chart 2 shows the Japanese yen moving up to test its 200-day moving average. Virtually all of the world's major currencies are gaining against the dollar today. Falling U.S. bond yields (and expectations for Fed easing in the first half) are also hurting the dollar vis a vis other currencies. As I've suggested before, there are usually two main beneficaries of a falling dollar. One is precious metal assets. Another is foreign markets. Currency traders can profit from these trends by shorting the dollar or buying foreign currencies. There is also a mutual fund that allows investors to bet on a falling dollar.
Chart 1
Chart 2
THE PROFUNDS FALLING DOLLAR FUND ... The green line in Chart 3 is the U.S. Dollar Index, which measures the dollar against six of the world's major currencies. The dollar fell from the start of 2002 to the end of 2004, and has been trading sideways since then. It's now showing signs of falling again. The reddish line is the Falling US Dollar ProFund (FDPIX). That inverse fund is designed to trade in the opposite direction of the Dollar Index. Chart 3 shows a nearly perfect inverse correlation between the two lines. The biggest gain in the FDPIX took place in the three years starting in 2002 as the dollar fell. It's now starting to rise as the dollar is falling. The whole idea of the FDPIX is to allow investors a way to benefit from a falling dollar. As the value of the dollar falls, the value of the mutual fund rises.
Chart 3
DOLLAR BOTTOM IS BEING CHALLENGED ... Earlier this year I addressed the possibility that the U.S. Dollar Index was forming a "head and shoulders" bottom. Chart 4 shows the three troughs marked by three circles starting with the "left shoulder" in early 2004 and the "head" in early 2005. The late 2005 rally stopped right at the early 2004 peak near 92 and formed a possible "neckline". That made the decline during 2006 a possible "right shoulder". I suggested awhile back, however, that any "right shoulder" needed to find support near 84. That was for two reasons. One was because 84 was also the bottom of the "left shoulder". The other was that a drop to 84 was a two-thirds retracement of the 2005 price advance. [Retracements of more than two-thirds usually result in a 100% retracement]. That makes 84 a critical support area. A decisive close below 84 would, in my view, rule out the bullish interpretation and would most likely result in a drop toward the 2005 low near 80. The daily bars in Chart 5 show the Dollar Index breaking a six-month support line, which raises the odds for a test of that 84 level formed during May. That means that the ProFunds Falling Dollar Fund is probably headed for a test of its 2006 high. Chart 6 (plotted through Tuesday) shows it heading in that direction.
Chart 4
Chart 5
Chart 6
HAPPY THANKSGIVING ...
