U.S. Dollar Index

The long-battered dollar found little respite in July, falling to a new all-time low vs. the euro (EUR) and setting multi-decade lows against the Canadian dollar (CAD), British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD).

The last time things looked this grim for the buck was in December 2004, when the U.S. dollar index (DXY) fell to 80.39. At the time, pundits predicted apocalypse for the currency, citing the deficit(s), the Iraq War, and growing reserve diversification, among other factors, but were quickly silenced by a year-long rally that, while hardly reversing the dollar’s overwhelming longterm downtrend, sent dollar bears into hibernation for a while.

Here we are again. As of mid- to late-July, the dollar index had just penetrated the December 2004 low, with the next milestone — the April 1995 low of 80.0 — in its sights. After that, the index’s next target is its all time low, 78.33, established in 1992.

Is the dollar going to pull off another head fake, a la 2005, or is downside follow-through more probable this time? Rather than dwell on the possible effects of economic intangibles such as the collapse of the sub-prime lending market, let’s look at what the price action in the U.S. dollar index portends for the future.