DXY now rests at its 200 day exponential moving average.

The US dollar should observe some technical resistance at this area, but should it break through and observe this moving average as support, then we could be in for further gains in the value of the dollar. Unless and until we see the US dollar surmount long term technical resistance, the US dollar remains in a long term secular bear market, from a technical perspective.

From an economic perspective, low yields on US Treasuries, and growing budget and trade deficits, have driven the dollar down in the past decade, and remain formidable headwinds. Coupled with still as yet bearish technical trends, and the recent dollar rally appears suspect until proven to be otherwise.

I would chalk the dollar’s strength up to the fact that as year end is now upon us, traders are winding down carry trades and locking in profits. So many were so bearish on the dollar, that the unwind has been somewhat sharp. Early January will be a time where traders once again look to borrow low yield US dollar-denominated debt, and go long on higher yield non-US dollar denominated debt. If those trades are put back on in early January, we could see the dollar sell off sharply.

By the same token, if we do not see a sharp sell off in the dollar, we should start to take this rally as a portent of a changed economic situation, where investors are actively going long on the US dollar based on a belief that the US economy is now relatively stronger and US dollar assets are now relatively more attractive. That may well be a game changer, and investors should keep a flexible attitude.

- Alex Trias

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