Dollar Index Headed for Rapid Collapse: Chart

Quantitative easing is really another word for currency wars. A weak U.S. currency puts continued pressure on the Japanese Yen, the Chinese Yuan, the South Korean Won, the Australian dollar and other currencies.

Cheap money also fuels speculation and this money quickly drifts into commodity markets and the ETFs that help propel commodity market speculation. This is inflationary for food prices.

The lower the U.S. dollar the greater the intensity of currency wars. The break below the key uptrend line on the Dollar Index chart was an early warning of the third round of quantitative easing (QE3). The most important question now is to use the chart to examine the potential downside limits of a QE3 weakened U.S. dollar.

The U.S. Dollar Index [.DXY  79.38    -0.03  (-0.04%)   ] is a basket of currencies. They are the Euro, yen, British Pound, Canadian dollar, Swiss Franc and Swedish Krona. The Dollar Index is used as a measure of the strength or weakness of the U.S. dollar.
There are three significant features on the weekly Dollar Index chart. The first feature is the uptrend line that started in September 2011.

One year later, in September 2012, the Dollar Index fell below this uptrend line. The weekly close below this uptrend line was the first signal of a major change in the trend direction. It came before the announcement of QE3, last week. Traders had good warning to move to the correct side of the new market trend by closing long side trades.

This advance warning was also delivered by commodity markets, as discussed last week in our column on the London Metal Exchange price moves.

The second significant feature is the support level near 79. This provided both support and resistance in 2011 and 2012. Temporary consolidation behavior may develop at this level. There is a low probability this level will provide strong support after the announcement of QE3 so traders will use the consolidation as an opportunity to build short side positions.

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The third significant feature is historical support near 74.5. This is the upper edge of a consolidation band between 73.5 and 74.5. This is the downside target for the Dollar Index following a fall below 79. This target can be reached very rapidly over three to four weeks. A rapid collapse of the U.S. dollar puts immediate pressure on other dollar-linked currencies.

There is a very low probability the U.S. dollar will resume its uptrend. The move below the value of the uptrend line and a fall below 79 confirm that a new downtrend has developed. The weakness in the U.S. Dollar will hurt export dependent economies and companies.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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