The Dollar Outlook for Q1 2005
The U.S. dollar has finally bottomed and is turning up for its first sustained oversold rally after suffering a major beat-down in 2004. The early part of 2005 is shaping up to be quite favorable for the dollar as the technical and psychological backdrop for the buck clearly show.
A deluge of super bearish dollar headlines filled the financial press each day in the final weeks and months of 2004, so much so that it became a moot point to even bother clipping them out for our "fear collage." Talk about going to the extreme! When was the last time you saw such extreme pessimism in the financial markets as we saw in the dollar in the second half of 2004? You'll be hard pressed to come up with any recent comparisons.
On my office bulletin board I have tacked up in recent weeks the absolute stand-out, dollar-related headlines that I feel "steal the show" in terms of super bearish sentiment. Here are some of them: "The world must adjust to the dollar's inevitable fall," "Sickly dollar dives against euro," "Dollar likely to fall further," "Only dollar weakness is assured...", "Greenback blues," and my personal favorite: "Greenback's slide seen as a one-way bet." Anytime the press tells you that anything in the market is a "one-way bet" you can bet they are going to be wrong!
Technically speaking, the dollar chart has a number of key factors shaping up for a positive first quarter. The first is the recent double bottom in the dollar index, made slightly beneath the downtrend channel in the daily chart. This qualifies as a "double channel buster," which should make for a strong oversold rally. As extremely oversold as the dollar has been of late I wouldn't be surprised to see that old market observation about the "rubber band" snapping back with equal force in the opposite direction in the next few weeks.
Next we can see a parabolic bowl in the daily chart which has so far acted as a guide post to the dollar's recent rally off its December lows. This parabola stretches into the first quarter and should be able to keep the dollar off its lows for the next few weeks if not push the dollar index level to higher levels along the way. Also worth mentioning is that the dollar is now above its 30-day and 60-day moving averages on a closing basis, which warns of a shift in the short-term trend from down to up. A breakout decisively above the upper boundary of the downtrend channel would confirm that the rally is more than merely an oversold technical rally so this will definitely merit our close attention in coming weeks.
Markets have a perverse way of taking back what they gave up, especially when too many traders become too complacent in their conviction of the prevailing trend. Right now it's all too clear that the great majority are too bearish on the dollar and it's likely that the dollar bears -- who had a great 2004 -- will be surprised with the dollar's resilience in the coming weeks.