(Written by our editor & published in DNA India)

August 9, 2010: As forecast last month, the dollar index finally reached its support zone between 79.50 and 80.50 last week.

The index measures the performance of the US dollar against a basket of major currencies. The falling dollar resulted in major currencies such as the euro, British pound, and yen rallying.
However, with the index hitting support, prices are in a low-risk area to go long on the dollar or at the very least book profits on existing dollar short positions.

The movement of the dollar has implications on the global markets. A rise in the dollar primarily signifies increased risk aversion. This has a negative impact on the stock markets and calls stock traders to be cautions. A rising dollar is also bearish for commodity prices.

The potential rise of the dollar is in play if the index does not close below 79.50, but a close below that level can take the dollar lower. On Friday the index came down to 80.05 and then rallied up to close at 80.52. The 80 area is significant for the index as it the base of a rally in May 2010 and also an area of consolidation in June-July of 2009.

Euro-dollar
Last week’s column predicted that the euro-dollar could break the 1.31 resistance area and that if it did, prices could rally to the 1.33 area. The pair did exactly as predicted and touched the 1.33 area last Friday.

The 1.33 to 1.34 area is a resistance zone from where prices can fall back. If it breaks above 1.34, the pair has quite a few resistance areas ahead. At this point it is advisable to dial down the bullish bias on the euro and switch to a neutral stance, where both long and short positions are on the table. Also remember that the dollar index is at support, which is bearish for the euro.

Dollar - yen
In line with the dollar index, USDJPY has entered its support zone. Unfortunately for traders the support zone is pretty wide, between the 81 and 84.50 area. It is advisable to switch to a bullish bias for this pair, given that it’s at a long-term support zone.
Keep in mind that the Japanese central bank is known for intervening in the markets if the yen appreciates too much.

British pound-dollar
The pound did not move as predicted in last week’s column and broke out of resistance. Prices are now at another area of resistance, which is not very significant in the 1.60 area. A correction from this area is possible given the fact that the dollar index is at support. However, the pair has a strong resistance at 1.6350-1.6450. If the dollar index goes sideways or falls deeper into the support zone, GBPUSD can rally up further, given its distance from strong resistance. Support and resistance areas often attract prices.

Chart Analysis

Dollar index chart