Everyone you turn in the financial press, it seems, you're confronted with discussions about the "horrible dollar crisis." This of course refers to the bear market recently experienced in the U.S. dollar index. But while pundits continue to talk of a "coming collapse" of the U.S. currency, has the time now come for us as contrarians to start thinking about a dollar turnaround? I believe so.
That the so-called "dollar crisis" has very likely ended smacked me right in the face recently. I noticed this ad for a top-selling financial book addressing the very same issue in the London Financial Times. The headline reads, "The dollar crisis has only just begun." Actually, just the opposite is likely true. If this isn't a sure-fire contrarian bottom signal for the dollar then I don't know what is! It doesn't get any more obvious than this, folks! The message is plain and clear -- the dollar crisis is over for now.
Despite what many pundits are saying, I believe the dollar has very likely seen its low for a good while. The dollar found support above a major long-term benchmark and has been grinding out a basing pattern every since. The weekly chart below shows the dollar index gently rounding out a bottom. But an even more persuasive case for a dollar bottom is found in the longer-term monthly chart.
Notice this pattern in the monthly long-term chart of the dollar. It's known as a "falling wedge" pattern and typically precedes at least an intermediate-term low, if not a longer-term bottom. According to R.W. Schabacker, the one who first discovered this pattern (not Edwards & Magee, as many erroneously assume), prices are typically slow to emerge from a falling wedge, which accounts for why the dollar has been slow to turn up despite clearly bottoming earlier this year. The double-bottom in the stochastics indicator under the chart confirms that a major low very likely has been seen (or else is being made as we speak).
Many analysts are talking as if the dollar is in a long-term downtrend, but the trend seems to be shifting even now. Let's ask ourselves, is it very likely the feds would allow the dollar to collapse at this point, especially after they've pulled out all the stops to engineer a recovery bull market these past couple of years? Extremely doubtful!
A glance at the long-term yearly chart of the dollar shows that every time in the past 20 years the dollar index has tested its critical benchmark 80-85 area (in 1990, 1992, 1995 and more recently in 2003) there is always a strong support between those levels followed by an upside reversal. The feds have no plans to allow the dollar to collapse anytime in the near future, especially as the global economy isn't fully integrated yet (the ultimate objective). Until then we can expect a supported dollar.