For months now we have watched the US dollar, expecting it to rebound as the dollar bears grew in abundance. The dollar has come to a crossroads. It will either rebound on a fear trade, such as the threatened Dubai default, or it will shrug off the bad news and carry on what has been called by George Soros "a managed decline".
My suspicion at this point, is that the market will largely ignore the Dubai default and we will see a continued downward trend to the 71 or 72 level on the US dollar index.
This market has become exceptionally difficult to read. There seems to be nearly continuous downward momentum as the important 75 level on the dollar index has been breached, yet volumes traded have continued to stay low as stocks continue to rise. This rally seems to be fragile indeed.
If the downward trend does continue, we can expect to see the S & P rise, crude rise above $80 and gold continue its moonshot.
It is my view, that once we reach the critical level in the 71-72 range, another shock in the financial system will snap the dollar out of its downward trend. Perhaps it will be a default by Greece or a Baltic country. The effect on the market would be a sharp stock market drop and rise in the US dollar index to 79 or higher, breaking the 200 day EMA. Gold could also pull back somewhat when this happens, which could present an excellent buying opportunity.
We will explore the area of Greek, Dubai, & American sovereign defaults in a future posting.