U.S. Dollar Shatters Major Support Level. Now What?

Posted by jbrumley on September 8, 2017 10:49 AM

Over the course of the past several weeks we've been monitoring the slow demise of the U.S. Dollar Index. Though ugly, there's always been a potential floor in place that could serve as a turnaround point (and prod). Though still overbought and overdue thanks to its 2014/2015 runup, there was always a slim chance the greenback might get back into a bullish mode again... or at least a sideways mode.

That's looking very unlikely now that the U.S. dollar has broken under the last of its plausible support levels and has reached levels not seen since 2015.

And that's early 2015, by the way. With a little more downside, we're back to 2014's levels, only this time we're moving in the opposite direction.

The weekly chart of the U.S. Dollar Index below makes it clear how things are shaking out. A major support level at 92.56 was damaged last week, and a minor one -- the last-ditch one -- at 91.92 was shattered with this week's drubbing. There's no prior low left to use as a potential support line, and there's no denying the dollar has a head of bearish steam in its tank. [Click the chart to enlarge it.]


The cause isn't entirely clear, though realistically speaking the pullback stems from a combination of factors. One of them is the more or less obvious one that the greenback never really merited the 2014-2015 rally, which was ultimately founded on the idea rampant rate hikes loomed. We've seen a couple interest rate increases, and more are on the way. It's been anything but "rampant" though. Indeed, market-based interest rates are sliding lower again.

Another reason the value of the U.S. dollar is slumping: Everyone else's currencies are gaining in value, largely as a result of monetary policies and initiatives unique to their countries that don't apply here.

Then there are the less-tangible X-factors like political turmoil, which are difficult to handicap, but handicapped nonetheless. Foreign investors and even domestic investors who have a vested interest in the value of the U.S. dollar are essentially betting against it, creating the very downward pressure on the value of the dollar they fear.

The cause of the dollar's downward move, however, is secondary to the fact that it's now in something of a freefall with no ground in sight.

Thing is, there is a potential floor on the radar. You just have to know how to look for it.

The short version of a long story: Fibonacci retracement lines are a great means of finding the market's organic lines in the sand when there's no other reasonable context for support or resistance. The two key Fibonacci levels established by the U.S. Dollar Index's 2014 low and its 2016 high are the 31.8% retracement line at 94.23, and the 61.8% Fibonacci retracement line at 88.37. The former has already been surpassed, or fallen below, as of late July. The latter, however, is still on the forward-looking horizon... the distant horizon. [Click the chart to enlarge it.]


Interestingly, the 88.37 mark is a level at which we saw a little resistance and then a little support in late 2014. It may be a contentious level again, if currency traders choose to notice and draw a mental line in the sand there.

On the other hand, in light of the pace of selloff we've seen thus far and the degree of panic we've seen so far -- and factoring in the degree of increased panic we'll likely see should the greenback continue to falter -- we can't exactly rely on the 88.4 area serving as a floor. We'll just have to wait and see.

There's an ultimate upside to the dollar's pullback... a few of them, actually. It's great for commodities like gold and oil, and oil prices need all the help they can get right now. It's also great for U.S. companies that sell goods overseas, as it makes made-in-the-USA goods more affordable to foreign buyers.

Whatever the case, inasmuch as the U.S. dollar's value impacts so many other things related to the stock market, this breakdown and the scope of further downside is worth noting. While the odds are good we could see a little near-term pushback, the longer-term damage is done.