Persistent dollar strength would back the dollar-centric world into an economic, financial and political corner that has no easy policy exit. The fall of democracy, liberty, and taxation with representation throughout much of Europe and Asian has supported a rally that few would call persistent today.
The majority still believes only a lower dollar lies ahead. A similar expectation preceded the 1925 to 1932 rally that bankrupted individuals, corporations, cities, and nations, and set the world on a collision course with global war.
The US dollar index, which has broken above the 2012 and 2013 highs, will likely defy bearish expectation by testing the upper channel of 2008 trading range (chart 1).
The invisible hand, aggressively distributing strength, has generated a bearish setup (chart 2). Bears setups which are generated when DI falls below -60% suggest a growing imbalance within trend. Imbalances often preceded trend reversals, so traders sitting on long-side profit should be tightening stops.
The major currency's bullish setup (DI greater than 50%) confirms concentrated distribution in the dollar. The bullish setup increases the probability for profit-taking or a pause in the uptrend ahead. The red boxes reveal that profit-taking from highs can be slow evolving process.
