Multiple Forces Align to Support the Dollar

Dollar index futures (DXM3:NYBOT) came under pressure last week but held above the island reversal low pointed out earlier this month. With the illiquidity of the long Easter and Passover holiday weekend largely out of the way (Europe is closed today), geopolitical risks should play a reduced role for the dollar this week, and the focus should shift to U.S. equities.

While Iraq, North Korea, Syria and Iran loom as potential negative catalysts for the greenback, the upside in equities should support the U.S. currency.

Tech Spec

The price action in the Nasdaq last week was clearly constructive. Tellingly, the index added volume Tuesday and Wednesday, and on Thursday it did even better, climbing 2.2% on its second-best volume of the month. Thursday's follow-through advance on heftier trading is noteworthy, since you would expect declining volume ahead of the holiday.

This price-volume action shows a preference for technology issues and a growing appetite for risk-taking, and it gives stock index futures an upside bias coming into the week. The Nasdaq finished last week at a three-month high, priming the Nasdaq 100 to move higher out of a developing Cooper Rule of Four pattern mentioned last month. Any continuation of the major averages' rally that began March 12 would likely add luster to dollar index futures.

Foreign Exchange

Supporting the view of a higher dollar this week is the failure of the most heavily weighted currency on the dollar index, the euro FX (ECM3:CME), to close an overhead gap. This leaves the contract in a head-and-shoulders top formation. Confirmation of the pattern comes on a move below 1.0545.

Also supportive of the dollar is the weak stature of June Swiss franc (SFM3:CME). Swiss francs had rallied as a flight-to-safety play in the build-up to the Iraq invasion. The safe-haven premium built into the Swiss unit continues to be unwound, and the pattern of lower highs and lows is much more bearish than seen in the correlated euro FX contract.