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Powell's Polish a Plus for the Dollar

If the U.S. doesn't have to go into Iraq alone, that's a positive for the greenback.
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Make no mistake about it: Secretary of State Colin Powell's speech Wednesday wasn't just for security council members and diplomats at the U.N.

The presentation, carried live around the world, wasn't designed only to sway global opinion polls. It had a broader purpose. To be an out. To give undecided nations a tool to make the politically unpopular decision to join the march to Baghdad.

In that regard, Powell's oratory succeeded. Fence-sitters like Russia, France and even Germany now possess the political excuse to climb -- however reluctantly -- on the war bandwagon. And that greatly reduces the chance for the U.S. and U.K. military to act alone.

If the U.S. doesn't have to oust Saddam Hussein by itself, that's a positive for the dollar, from the perspective of both military costs and nation-rebuilding costs. It's also positive for the dollar from a psychological standpoint because it removes a lot of the uncertainty of a go-it-alone policy. Unity here is strength.

What the Chart Says

Price action in dollar index futures tends to confirm the view that the dollar will produce a healthy rebound. The March

dollar index

(DXH3:NYBOT) has amassed a collection of reversal signals, implying it will make a healthy correction out of its pronounced downtrend. First we have a near-doji that occurred just below our

100.00 price target.

Dojis, or candlestick bars where the open and close are within a few ticks of each other, indicate that buying and selling pressures are in balance and that a change in trend is imminent. As the chart below shows, the doji was followed by a five-day reversal before the plunge to a new contract low on Wednesday.

But Wednesday's bar is also significant, confirming that the trend-changing doji is still playing a role. On Wednesday, the dollar index attracted breakdown players looking to get short at the new low. Then it turned up strongly, potentially setting up a bear trap for the new shorts. Wednesday's action culminated in a candle that completely engulfed the previous day's price action in a wide-ranging outside bar up.

The dollar index also traded back into the Feb. 4 gap and closed above the 10-day moving average, marking the third close above this line in four outings. Collectively, this is very constructive for the dollar.

Helping to confirm the likelihood of a correction in the dollar index were

bearish

engulfing patterns in the March

euro FX

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(ECH3:CME),

British pound

(BPH3:CME) and

Canadian dollar

(CDH3:CME).

The threat of additional unannounced currency interventions to weaken the yen are also dollar-index positive. Japan's Ministry of Finance confirmed last week that it took the unusual step of conducting unannounced interventions in January in an effort to bolster the yen and facilitate an economic recovery in the world's second-largest economy. No market likes uncertainty, and the lack of transparency foments uncertainty.

Less Mettle for Metals

After triggering and then confirming a potential move to

higher ground on Monday, April

gold

(GCJ3:COMEX) rallied to a high of $384.50, providing two-day gains of up to $7 an ounce -- even with Tuesday's gap up opening. But any corrective rally in the dollar will likely weigh on gold. We're unlikely to see a rally above gold's current highs without new lows in the dollar.

March

silver

(SIH3:COMEX) performed like gold's ugly stepsister Wednesday, matching recent highs but demonstrating pronounced weakness by ending below all the closes from the past month. Here we have yet another example of an outside bar down at a major high, suggesting silver will break down from this reversal pattern.

Other Markets

March

sugar

(SBH3:NYBOT) and

cocoa

(CCH3:NYBOT) are both momentum markets set up in pullback-from-high patterns. Look for them to trigger once they trade above the high bar in the pullback.

Although not a momentum roller, March

cotton

(CTH3:NYBOT) is similarly poised.

Finally, March

wheat

(WH3:CBOT) has logged multiple narrow closes at the low, priming it for a larger-than-normal move as it reverts to its mean volatility and daily range. As I wrote in this column recently, wheat appears to have put in an intermediate-term bottom and looks ready to trade higher.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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