The dollar plunged with startling ferocity late last week, driven by heavy selling. This was very bearish action that signals panic, and the probable onset of a severe downtrend. A break below the crucial support at 80 on the dollar index is expected to mark the transition from a clandestine unloading of dollar assets to an all-out stampede to "get what you can for them" before it's too late.

The conditions leading to an inevitable dollar panic sell-off did not come about overnight. They are the result of years of abuse, principally by the Federal Reserve of the US, which has created a veritable blizzard of dollars, and the universal acceptance of this "funny money" has, up until now, allowed the United States to freeload economically on the rest of the world, living way beyond its means. The exponential growth in dollars has been and is created electronically at the touch of a button, so that paying for anything is never a problem, whatever you want you simply print the extra money to pay for. Because foreigners have so far played along with this game, they are now widely, and to some extent understandably, regarded as stupid. However, it is a dangerous mistake to underestimate the mental capacities of other peoples. The Chinese, in particular, have an ancient and deep culture, and when it comes to strategic considerations, can outthink - and outflank virtually anyone. So what's going on? - why have they accepted a mountain of paper and IOU's over many years in exchange for real hard work and a vast quantity of real tangible products? The Chinese, and others, have done this to carry them over a bringing period during which they have built up their economies and infrastructure. Their goal - which they are fast moving towards - is to arrive at the point where there is sufficient domestic and regional demand that they no longer need to rely on orders from countries like the United States. At this point - which we may arrive at sooner rather than later - things will become very dangerous for the US dollar, and the situation is actually far worse than many now believe, because the Chinese and others are preparing to WRITE OFF THEIR DOLLAR ASSETS AS A BAD LOSS - they will try to get what they can for them, of course, but otherwise will be ready to fall back on domestic and regional demand and tough it out, thus severing the umbilical with the United States, which will be left stranded, with no takers for its funny money, a gutted manufacturing base, astronomic debts and fiscal chaos, and a huge military it can no longer afford to service. When the forces of globalization are let loose, as they have been, this is actually a natural and inevitable process, as orders and work simply move to the lowest bidders. Europe and the United States are uncompetitive and will be sidelined by the powerhouse economies of China and South East Asia. The Chinese and other trading partners with the US are already rotating out of dollars and into Dinars, Euros, commodities generally and Precious Metals at an ever increasing pace. As we already know, this has been a primary driver for the commodities boom. The recent attempt by the United States to maintain its dominance by brute force - a big reason why Iraq was invaded was that it was planning to sell its oil in Euros - is right now, quite literally, running into the sand, and it is now only a question of when, not if, the helicopters arrive on the rooftops to evacuate the last of the embattled US service personnel, like in the film "The Killing Fields", although a last wildly dangerous attack on Iran still cannot be ruled out.

Having looked at the fundamentals, let's now see what the charts have to say about the dollar.

On the 1-year chart for the dollar index we can see how the plunge on Thursday broke the dollar down out of a gentle uptrend that had been in force from the May low. It fell steeply again on Friday to arrive in the support zone at the May - June low. This support may provide temporary relief, but the severity of the decline suggests that it won't be long until it resumes, assuming it pauses at all that is, which it may not. Note the bearish alignment of the moving averages, with the 50-day having closed up the gap with the 200-day in recent months, creating the potential for another severe decline.

On the 6-year chart we can see that the dollar had been marking out a potential Head-and-Shoulders bottom pattern since early 2004, but that the action of the past few days signals that the pattern is aborting, and a clear break below the May lows, which we are close to, will project the index down to the crucial long-term support at and approaching 80. What is the origin of this strong long-term support? To see this we will have to look at a chart going back many years.

The chart going back to early 1987 shows the origins of the strong long-term support at and above 80, for on this chart we can see that it has bounced repeatedly from this level. It approached this level way back in 1978 (not shown), and again in late 1990, and it bounced from it in 1992, again in 1995, and in late 2004. Clearly it is unlikely that the dollar will drop to this level and fall straight through it, without first pausing above it for a while or staging a weak rally. That said, however, the fundamental outlook for the dollar is truly awful for reasons made clear above, and so, despite the strength of support at this level, the dollar is not expected to hold above it for very long. Over the past couple of months it has become obvious to all but those who started it that the US has lost the war in Iraq, and can now only engage in a face-saving or damage limitation exercise. This has further damaged US credibility worldwide. The deficits are a running sore that continues to exert a bearish influence, and big dollar asset holders such as the Chinese are scrambling to unwind their dollar positions, in a manner that avoids precipitating a panic, which will be quite a feat if they achieve it.

What will happen to the dollar if it breaks below the immensely important support at 80? The prospect is an all-out panic and a rout, and its anyone's guess where it will finally bottom out.

Many forward thinking and intelligent US readers are already aware of the gravity of the situation, and have been mobilizing themselves to get at least a portion of their assets either out of the country, or at least out of US dollar denominated assets. This is the way to go, and is what has been emphasized repeatedly on the site.

This is the way to go, and is what has been emphasized on www.clivemaund.com.