Will the Dollar’s strength continue?

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: MONTHLY DOLLAR EURO CHART The Dollar has pulled back hard - but we think it may well find good support at the band 1.1875-1.3812. Note well the intersection of the rising diagonal with the horizontals. If that whole area of coincident support were to break the market would feel very vulnerable – nest stop 1.1875. MONTHLY CABLE CHART: Cable too, is approaching a vitally important level of support. But we would be buyers of the Dollar only on a clear break of 1.7365..... Will these levels against the Euro and Sterling break? Look elsewhere.... MONTHLY AUS/ DOLLAR CHART: The Aussie Dollar Cross shows what can happen. It is a broadly similar pattern as, for example, Cable - but the breakdown is far more complete. It doesn’t follow that the Sterling and Euro will collapse, but the odds favour that outcome. The Macro Trader’s view: After an impressive bull run which began back in July, culminating in a high on September 11, the Dollar reversed so abruptly, that it wasn’t clear whether the bull run had foundered or it was merely correcting. Indeed, so far did it correct, that the bull run began to look as though it had only been a correction within the previous long Bear market that traders had judged over. But the Dollar was reacting to great uncertainty in the US financial markets: Lehman brothers had collapsed, Merrill lynch had sold itself to Bank of America and AIG was nationalized. The financial system seemed on the brink of collapse. This was only heightened when Treasury Secretary Paulson announced a rescue package that the House of Representatives rejected after very intense negotiations among policy makers, legislators and the Administration. But that rejection seemed to mark the end of the Dollar’s recent period of weakness. Traders recovered from the shock of rejection and assumed a deal of some sort would be agreed and turned their attention to other major economies. What action were authorities taking in the UK, Euro zone and elsewhere to protect their banking system? In short: none. Their strategy seemed to be little more than to pray that the US passed a rescue plan that included foreign Banks, and as several Banks around the world failed and needed either rescuing or propping up, the Dollar gained strength; so much so it has made new recent highs. So where now for the US economy? In our view the Dollar remains embarked on a bull run. The price action of recent weeks has been a correction, and with or without the rescue plan (which we think will eventually be agreed in one form or another) we judge traders will continue to favour the US currency over its competitors, as both the UK and the Euro zone are on the threshold of recession. And other leading economies are beginning to feel the strain of a US economy that is no longer acting as the consumer of last resort. Already China is failing to fulfil contracts to buy Iron ore since demand has dropped recently, denting the argument that the economies of India and China would be able to keep the global economy moving forward. The global financial system faces challenges that will force leading economies into recession. The Dollar is a buy because the US Government is at least acting proactively in trying to repair the damage rather than hope someone else will do it for them. Mark Sturdy John Lewis Seven Days Ahead