The Dollar's Biggest Advantage: It's Not The Euro

The U.S. dollar appears to have found its footing. It was the beginning of September when the greenback surged off of its bottom and broke out sharply to the upside. But by the start of October, it peaked and rolled back over. Since last Friday, the U.S. dollar seems to have bottomed once again, and now looks like it’s gearing up for another run higher. A variety of factors should help provide a tailwind for the dollar going forward.

A key fundamental factor supporting the U.S. dollar is simply that it is not the euro. Across global currency markets, the relationship between these two currencies is most pronounced. Overall, 60% of the direction of the U.S. dollar is determined by the euro. And the economic problems that continue to plague the European continent remain severe. Either European policymakers resort to rescue policy actions that are likely to apply weakening forces on the currency, or the problems are left to fester further, driving capital to flee the continent altogether. And the most liquid safe haven for capital to migrate to is the U.S. dollar.

The U.S. dollar also enjoys a great deal of technical support at these levels. First, when examining the PowerShares DB US dollar Index Bullish ETF (UUP), it has been responding well in recent days to support at its 200-day moving average (blue line on chart). At the same time, the U.S. dollar is also receiving support from its sharply upward sloping 50-day moving average (red line on chart). In addition, it continues to rest right above what was previously strong resistance and is now support at $21.75 on the UUP (orange horizontal line on chart).

The convergence of these three support levels is collectively providing meaningful support for the U.S. dollar at current levels. Moreover, the U.S. dollar’s Relative Strength Index recently bounced off of the 40 level, which has been a bottom signal for the greenb! ack sinc e the end of QE2 on June 30. Furthermore, momentum readings for the dollar are at historically wide bearish extremes, suggesting that a bounce back in momentum may be likely in the near term.

All of these factors are increasingly supportive of the U.S. dollar going forward. Of course, currencies can be unpredictable, particularly in an environment where the next government policy intervention can be right around the corner. So any bullish positions in the U.S. dollar should be undertaken carefully and with a close eye along the way.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This post is for information purposes only. There are risks involved with investing, including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.