Dollar’s decline is leaving a bearish imprint on its chart

The dollar's fall by as much as 10.9% since its March high of 102.99 is creating a multi-year double-top - a bearish, M-shaped chart pattern

  
U.S. currency is seen in this picture illustration taken March 6, 2020.

U.S. currency is seen in this picture illustration taken March 6, 2020.

REUTERS/Mike Segar/Illustration

(The opinions expressed here are those of the author, a columnist for Reuters.)

A steep decline in the U.S. dollar index since March is creating a rare but ominous technical pattern in its chart, which could signal that a rebound in the greenback in recent days may be short-lived.

The dollar's fall by as much as 10.9% since its March high of 102.99 is creating a multi-year double-top - a bearish, M-shaped chart pattern containing two peaks and a trough, a technical analysis of the dollar index shows. The pattern will be confirmed if the index falls another 5%.

Technical market analysis examines chart patterns and past behavior of the currency and is closely followed by traders, which can make it self-fulfilling. Multi-year dollar double-tops have often preceded a decline in the currency.

The most notorious double-top for the dollar came in 2001-2002, in the aftermath of the September 11, 2001 attacks on the United States, and was followed by a 33% fall in the currency through 2004. It then rallied for about 11 months before continuing its slide to record lows in 2008.

This time, the long-term technical signal is compounded by fundamental factors that have already turned many analysts bearish on the longer-term outlook for the world’s reserve currency.

Near-zero U.S. Federal Reserve interest rates in response to the coronavirus crisis, for example, have robbed the currency of its yield advantage, roughly halving 10-year Treasury yield spreads over German Bunds and Japanese government bonds this year.

The dollar's outlook is far from certain, however. The double-top is just one factor in determining the likely path of the dollar and can sometimes produce false signals.

Seasonal factors also often boost the dollar between August and December, and recent comments from ECB chief economist Philip Lane and President Christine Lagarde - that the exchange rate matters for monetary policy - may discourage traders from weakening the dollar too far.

Moreover, in the short term, some signals remain positive. Recent economic data such as last week's U.S. employment and ISM reports, for example, pointed to continuing, albeit slowing, recovery and have favored the dollar.

Indeed, the dollar has gained more than 1% since its September 1 low. Its decline was halted when it hit a key Fibonacci retracement level, a statistical measure that traders believe keeps the currency range-bound, with support levels when it is falling and resistance when it rises.

With the index currently at 93.08, the next point of resistance comes at 94, but there's scope for gains to 94.63, the dollar's initial coronavirus low in March, the technical analysis shows.

Even a potential speculative short squeeze probably would not carry the dollar above June's 95.71 low, which is the next point of resistance, because that's where prices began to break down in July and also near where they started the year.

In addition, measures put in place by the Fed this year to increase the availability of the dollar could keep the greenback from rising higher.

Taken together, the technical and fundamental analysis means it will likely be difficult for the dollar to break a downtrend that has been in place since the 1980s, when U.S. interest rates hit all-time highs.

The two peaks of the possible double-top now are the dollar index's 2017 post-global-financial-crisis high and the coronavirus pinnacle reached on March 20.

Its trough lies at 88.25, matching 2018's low and the 50% Fibonacci retracement of the 2011 to 2017 uptrend, a strong support level from a technical perspective.

That makes the current double-top, if it is confirmed, relatively significant because it potentially makes it tougher to break. But it also increases the stakes if it does, because the next support level is at 84.58, representing a 9% drop from current levels.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(Editing by Burton Frierson and Edward Tobin) ((randolph.donney@thomsonreuters.com))

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