First, I'd like to show a short term chart of the UUP, the ETF proxy for the US Dollar. Again, I'm showing UUP because it has trading volume associated with it.
Now that the dollar has broken higher, I fully expect it to run towards my price objectives. It's showing no signs of slowing down, in spite of its extremely overbought momentum indicators. Remember, the trend is your friend.
While I believe the DXY will make a run at 110 (and 29 for UUP), there is something even bigger brewing when you look at it from a long-term perspective. There has been much debate recently about whether or not the dollar has finally broken out of a 30-year downtrend, going all the way back to 1985. The point of contention has centered around whether one utilizes a logarithmic (log) chart or a standard, linear chart. To explain the difference between the two, I'll quote from the Motley Fool, as they provide a nice summary:
Linear: With a linear chart, the Y axis is structured in such a way that an equal distance along the axis represents an equal absolute change in stock price. Shifting up three spaces on the vertical axis might represent a change in stock price from $10 to $13. Shifting up another three spaces further up on the axis might represent a change in stock price from $45 to $48. Three spaces, three dollars. Every time.
Logarithmic: With a logarithmic chart, the Y axis is structured in such a way that an equal distance along it represents an equal *percentage* change. So if you move up three spaces on the vertical axis, that might represent an increase of 15% in the stock price (perhaps from $20 to $23). Shifting up another three spaces further up on the axis will represent another 15% change in the stock price, but this time perhaps from $80 to $92. Note that in the first case, the absolute price change was $3. But further up the axis, the three spaces represented an absolute price change of $12.
While this chart doesn't yet reflect today's trading, as of this writing, the DXY is right at 96. Given the fact that it had a bullish breakout on the daily chart, with a short-term price target 15% higher, I am confident that we've now seen a bullish breakout on the log chart. There is no more debate. The dollar is going higher in the long run, perhaps much higher. While the daily and weekly momentum indicators are still way overbought, that doesn't mean much when you look at long-term trends. The monthly charts above show that dollar's RSI remained in extremely overbought conditions for more than four years back in the 1980s. We've only entered overbought territory in the last 6 months so, from a historical comparison, the dollar can stay overbought for long time to come. Same goes for the MACD. On the monthly chart, the MACD is nowhere near where it was in the 1980s - again, leaving plenty of room to run.
There are tons of consequences, both positive and negative, to having such a strong dollar, particularly as the world's reserve currency. Remember, currencies are valued relative to one another so dollar strength equals corresponding weakness in the currencies against which it's measured (Euro, Yen, Pound, CAD, Krona, and Swiss Franc). Also, if the Fed actually raises interest rates in a few months like they keep threatening to do, it's only going to add fuel to dollar's rally.
A part of me seriously doubts that the Fed is going to actually raise rates. We've seen central banks around the world slashing interest rates for the past year, which, of course, is a stimulative action. They wouldn't be cutting rates if economic activity was strong and growing. So why would the US Fed raise rates when 1) the dollar has been so strong and is poised to go higher and 2) worldwide economic activity is stagnating to the point that other central banks have been aggressively cutting rates? It would be economic suicide, in my humble opinion, to raise rates in this kind of environment.
But what the hell do I know? I'm just a chart guy.