The Euro has spent the last six months wiggling higher and even managed to get back above 115, albeit very briefly. It was, however, no match for 10 years of overhead resistance and was immediately slammed lower. It might be hard to see on the chart, but it's in the process of forming a perfect "bear flag" formation. These are nothing more than relief rallies that occur in a bear market. If/when the Euro breaks below 110, then it will accelerate to the downside. So how low will it go? Well, based on technicals alone, I see it falling to the mid-80s without much of a hitch. There's really no firm support anywhere between current levels and the congestion from the early 2000s.
Why does this matter? It matters because the Euro represents 57.6% of the U.S. Dollar Index (DXY). As I posted last September:
The US Dollar Index (technically speaking) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar's value compared only with a "basket" of 6 other major currencies which are:
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
The dollar, or any fiat currency, has no intrinsic value whatsoever. It can only be measured against the purchasing power of other currencies. By this measure, the USD goes up when this basket of currencies goes down, and vice versa. The Euro, clearly the heaviest weighting at 57.6%, has four times the influence the next closest weighting, the Japanese Yen. So obviously any moves in the Euro will have an exaggerated effect on the USD.
I would be remiss, of course, if I didn't mention Jim Rickard's book Currency Wars: The Making of the Next Global Crisis. It's a great book and I'd highly encourage you to read it for full explanation of what's going on with world currencies. Rickards argues that by engaging in currency wars, the United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.