By Jim Donnelly, Olson Global Markets

With the U.S. Dollar Index (DXY) ending last week on yet another soft note, it is worth pointing out that it closed just above key trend line support located at 76.30. While long-term technical studies remain weak, they are not yet in an oversold condition. As a result, there appears to be a reasonable “risk” that the 76.30 level could easily be taken out, as the DXY searches for a more solid level of support.

The trouble is, drawing a trend line off the last two cyclical lows of September 1992 and March 2008 projects a possible decline in the greenback down to the 69.50 area. That would represent another 9% drop in the value of the dollar from current levels. “Quantitative Easing Part 1” and “Quantitative Easing Part 2” are clearly the most recent culprits forcing this decline. That is what gold prices, as well as a plethora of other commodity prices, have been telling for at least the last 2 years.

Clearly, a weaker dollar would be a plus for U.S. Dollar denominated equity assets, as well as U.S. produced goods and services. Employment levels, in theory, would rise and the economic engine would begin to run more smoothly, but at a cost. Intermediate-to-long term rates would likely rise, adding pressure to mortgage lending, but helping bank profitability overall. Food, fabric and gasoline inflation would likely continue to rise briskly, which could thwart consumption domestically.

In any event, this will likely be the week that currency traders have been waiting for: “A Showdown at The-Not-So O.K. Corral”.

http://www.ogmarkets.com