US Dollar Rally Closes at New High

| July 7, 2012

The US dollar index closed sharply higher this week, moving up to a new high for the rally from August 2011. At the beginning of May, we identified the potential development of a bullish consolidation formation. The consolidation formation developed as expected and the index broke out in late May, signaling the highly likely resumption of the uptrend. The initial target of the breakout move remains the 84.50 level, although the rally is strengthening and there is no meaningful resistance above current levels until the 88 area, so the advance could certainly move much higher.

From a big picture perspective, the rebound off of the last long-term cycle low (LTCL) that we identified in September continues to gain strength and a subsequent return to the previous long-term cycle high (LTCH) near 88 would suggest that cycle translation is in question.

The US dollar continues to experience violent swings higher and lower as the structural conflict between deflation and inflation rages on. Considering the unprecedented liquidity operation that the Federal Reserve continues to engage in, it will be interesting to see how far and long the current rally is able to proceed. As always, judiciously applied chart analysis will enable us to identify the key market developments as they occur.

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