2008: Time to Buy the Dollar?

The first leg up in the US dollar is losing some momentum, and it would not be surprising to see the greenback pullback as the year winds down. This anticipated pullback will likely provide a new buying opportunity, based on technical and fundamental supports.

Consider the technical backdrop for the dollar. I monitor the 5-day and 20-day moving averages to help identify the near-term trend. In early December, the 5-day crossed above the 20-day moving average for the dollar against the euro, Swiss franc and yen. As is often the case, the dollar's move was initiated first against sterling and the bullish dollar signal was generated in mid-Nov.

In addition, the euro, yen and dollar index all appeared to carve out head-and-shoulders reversal patterns.

In the euro, the pattern projects a move toward $1.4100, just below the 50% retracement of the euro's rally since mid-August. The 61.8% retracement is found near $1.40.

The head-and-shoulders bottom in the dollar against the yen projects toward JPY115.00. The 50% retracement of the dollar's summer and fall decline against the yen comes in near JPY115.70, and the 61.8% retracement is seen near JPY117.70.

However, the first phase of the move may already be completed. The euro has fallen to almost $1.4300 from the peak of $1.4965 on Nov. 23. In recent days the euro's downside momentum has faded and it looks like a base is forming from which the euro could bounce back into the $1.4500-$1.4600 area before the new year. From there it may be worth trying to sell again.