US dollar to resume downtrend?

2012-FEB-21

“Talk of the town” is of course the news that the eurozone has agreed a new €130 billion package of loans to Greece, with the Greek government expected to accept greater oversight over its budget and private creditors agreeing to take a 53.5% write down on their Greek sovereign debt. It is hoped that via strict adherence to austerity measures, the Greek government can reduce its debt from 160% of GDP to 120.5% of GDP by 2020.

There are, however, less sanguine projections. ZeroHedge links to an article by the FT’s Peter Spiegel (subscription required), who notes that “A ‘tailored downside scenario’ prepared for eurozone leaders in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 – far below the target of 120 per cent set by the International Monetary Fund… Under such a scenario, Greece would need about €245bn in bail-out aid, nearly twice the €136bn under the “baseline” projections.” Spiegel also comments that “even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out.'

Unsurprisingly, the euro shot up against the dollar on news that a deal had been reached. Precious metal prices have also risen amid the general flight from safe-havens, with the yields on 10-year US, Japanese and German government bonds also rising. The Dollar Index (USDX) is currently trading at 79 – just above its 100-day moving average at around 78.8. Moving Average Convergence Divergence (MACD) on the USDX chart is showing slight positive divergence – indicating the bulls still have a slight advantage – but given today’s euro news, the dollar could easily drop below the 78.8 moving average. Given that the eurozone crisis has at least been put on ice temporarily, the dollar could be at the start of a weakening trend against the euro and other major currencies, as was seen from the summer of 2010 until the autumn of last year (when euro woes started to trump US concerns in the minds of traders).

Looking at the USDX chart over the last decade, the story is one of the dollar’s long and gradual decline. When they have come rallies have been short and violent, punctuating longer multi-year periods where the dollar has drifted lower. If indeed we are at the start of one of these long drifts lower in the USDX, and thinking from a longer-term perspective, 72 remains the key-level that precious metal holders need to remember. 72 is close to the all-time low in this index, reached in March 2008. 72 is the level that was nearly reached last spring, during the dollar’s last bearish spell. Sub-72 is the point at which the dollar enters “no-mans land” as far as the markets are concerned. The risk then of a dramatic and perhaps catastrophic flight from the world’s reserve currency will increase exponentially.