US Dollar has dropped to the lowest level this year. It is not against one currency. In fact, dollar index, which measures USD against a basket of currencies is at levels not seen since late 2008. Most damage is done by “the other dollars”, CAD, AUD and NZD, which are solid performers. It is generally accepted that this is caused by increased demand, and prices, for commodities. Those dollars represent economies largely based on production and export of raw materials, which are soaring. While the increase is not on the monumental scale of last couple of years, these moves are certainly noticeable. Sugar, for example, is approaching the highs of 2005-06.

While demand for commodities could explain why the likes of AUD are strengthening, it doesn’t make a good case for European currencies. These are also gaining ground on USD.  Euro and British Pound are also on the verge of yearly high. They are certainly not large scale providers of raw materials. On the contrary, they are net buyers, just like USA. So, what really is behind falling dollar? Most likely combination of things. Perhaps the towering federal deficit is finally catching up? Maybe the projection of NEW debt going forward is cheapening the dollar? This would make sense to me, because there is no way that this money can be repaid at today’s value.

Another thing pulling on the dollar could be costs related to the proposed health care reform. Both supporters and opponents of the changes are throwing numbers around as if anybody new what the real cost would be. Fact is, since there is no measuring yardstick for a reform on such scale, nobody really knows. Every single price tag is a guess with a huge margin of error. For the first time, though, white house officials admitted that new taxes on most Americans will have to be imposed. Not just the very rich, as was the campaign pledge. Promise on new taxes is not good news for domestic currency and is yet another reason for USD to drop.

Yesterday I mapped out a long trade in EUR-CAD using 4H chart. So far this pair is still in holding pattern, within a wider range established last Thursday and Friday. Intermediate term trades, on 4H charts, may take days, or even couple of weeks to develop. One has to be patient and wait for the situation to unfold. Meanwhile, I’ll take a look at an old friend, GBP-CHF.

Daily chart still suggests consolidation, which started couple of months ago. Lately price pulled itself towards the upper level of this range, as if getting ready for a breakout. While this is undecided yet, smaller time frames look promising, especially hourly chart. Relatively strong resistance level is forming at 1.8030. I’d like to buy it just above it, with a target of 1.8200. Also, another buy order is placed at 1.7860 and if this is filled, objective will be 1.7990. Pretty soon I’ll have to look at bigger picture of this pair and decide on some longer term plays.

Mike K.