Greenback May Be Circling Black Hole

June 07, 2002

The seven-year gravity-defying stunt of the currency market star, the mighty dollar, seems to be drawing to a close.

Radar screens of technical analysts, who study charts to gauge trading patterns, are flashing warning signs that the dollar could sink sharply in the next few months, especially against the euro.

Chartists are looking for a 6 percent jump in the euro over the next few months, bringing the euro zone currency back to around $1.00 in value from 94.36 cents today.

"Right now, Big Money is betting on the euro," Hans Kashyap, president of Analytics Research Corp, told Reuters. "You can conjecture all you want on fundamentals but from a technical standpoint, prices don't lie. They move on supply and demand and on big money."

They also are on red alert as they pore over dollar index charts, which map the greenback against a basket of currencies. The dollar index is veering ever closer to the 108 mark, a major level that many chartists consider the last line of defense holding dollar bears at bay.

If the index plunges through this level, technicians say the mighty U.S. currency could be in for a messy decline, even a crash.

It certainly has been heading that way in recent weeks. On Friday, the dollar carved out yet another 16-month low against the euro, bringing Europe's single currency to 94.90 cents, and is hovering right above six-month lows versus Japan's currency, with one dollar buying 124.50 yen.

Technicians from currency to stocks, derivatives and gold markets have been keeping an eagle eye on the dollar since it breached key levels late last week, concerned that a dollar crash would reverberate throughout markets worldwide.

"Why should we care about a potential dollar bear market?" says veteran chartist and options trader Bernie Schaeffer, who heads his own firm, Schaeffer's Investment Research.

"Because hundreds of billions of dollars of overseas money has flowed into our financial markets since the mid-1990s, and this has been a huge prop for U.S. stocks."

SIGN OF DOLLAR BEAR

Unless dollar bulls roar back to life and drive the euro back below the 89-90 cent level, technicians expect a run to key resistance at 96 cents. On the dollar index, that would be equivalent to inching closer to the critical 108 mark. This scenario could turn ominous because it would be a serious crack of "support." Usually buyers emerge in bulk when a support level is reached, boosting prices. But if support is broken, it could open up a major dollar selling pattern.

The mirror image of the dollar's fall through support was the euro's zooming through "resistance", or a level following a rally at which sellers usually offload a currency, driving it lower.

But a rally through resistance, in this case 93 cents, opened the way for euro's advance to over 94 cents and the resistance sequence from there would be 96 cents, followed by dollar parity and possibly beyond, argue the chartists.

The euro, worth $1.17 at its birth in Jan. 1999, sank to arecord low of 82 cents by Oct. 2000, then moved sideways. This year, the euro's advance gathered steam in April.

"This important technical breakout initially targets (a move by euro to) 96 cents, then parity, then $1.04," said John Kosar, technical analyst at Arbor Research & Trading.

"The bullish implications of this pattern will remain valid as long as 90.60 cents to 89.20 cents support holds."

The dollar also fell against the yen, down from 134 yen in February to about 124 Friday. Technicians expect more weakness for dollar vs. yen longer-term, but say for now support holds at 123 yen. Helping out is dollar buying by the Bank of Japan to stop yen strength from curtailing Japan's exports.

But it's really dollar's weakness against the euro that is catching the chartists' eyes.

The euro, Kashyap of Analytics Research says, is trying to carve out a bottom after it successfully tested its record lows against the dollar. It did so when it hit 83.50 cents in July 2001, and held, and 85.50 cents in Feb 2002, and held.

This resulted in a series of higher lows, a telltale sign of a bull run for the European currency, Kashyap said.

"One of the strongest cases for accumulation is when you see higher lows," he said. "In no uncertain terms, it shows accumulation. Someone who knows is buying big time."

Some money is betting on gold, seen by "gold bugs" as the ultimate currency.

As the dollar fell and stocks went into another deep blue funk, safe haven investments soared, such as gold, which many believe has emerged from a two-decade bear market. Bullion has bolted up to $330 an ounce recently from lows near $255.

The jury is out though on how much of a rise there could be after euro-dollar parity, with firm resistance at about $1.09.

"I don't think there's a soul on planet Earth that does not think the euro is going to parity," Robert Zukowski, technical analyst at 4CAST Ltd, told Reuters.

"But I don't think we can go much beyond parity. This is not a market where we go to $1.10, $1.15, $1.20 and so on."

DOLLAR DOUBLE TOP

Long-term charts put the dollar's recent declines in perspective, as they should show a multiyear bull run from 1995, followed by some negative signs.

The dollar index chart, for example, shows the gauge rising sharply, then hitting a wall of resistance at the 120 level, twice, in January 2002 and before that July 2001.

This action, created what technicians call a bearish "double top", a pattern that resembles the letter "M".

What confirms such a pattern is the fact that DXY recently undercut the September low reading of 111.31 this week. It now teeters just north of a key support band from 110 to 108. The last time the index was at the lower level was January 2001.

"The most recent pullback off 120 resistance is quite ominous," Schaeffer told clients in a report. "The last 'line of defense' .. is just below current levels."
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