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Some Hope for the Dollar?

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Although I’m not keen about the dollar’s prospects over the next 2-3 years, a Bloomberg story says that it appears to be oversold relative to the euro. However, this view is based on technical analysis, which some dismiss as a close cousin to astrology.

From Bloomberg:

The euro’s record-setting rally may not extend through the end of October, according to analysts who rely on market patterns for their predictions.

No fewer than half a dozen indicators that measure the speed and slope of a currency’s rise and foreshadowed the euro’s three biggest slumps of the past year show the best may be over after it strengthened 4.7 percent last month to its all-time high of $1.4278. Citigroup Inc., the largest U.S. bank, says the euro may drop to below $1.37 unless the currency maintains its momentum.

“We are a little more cautious,” said Tom Fitzpatrick, Citigroup’s global head of currency strategy in New York. “Whenever you see acceleration” of this magnitude, “it’s a sign we may have a correction,” he said.

The euro’s appreciation is putting pressure on the European Central Bank to find a way to curb the gains. French President Nicolas Sarkozy and Fiat SpA Chairman Luca Cordero di Montezemolo complain that the rise in the currency shared by 13 European nations is hurting their economies….

The currency may drop as low as $1.367 by the end of October, according to Citigroup and Zurich-based UBS AG, the biggest currency traders after Frankfurt-based Deutsche Bank AG. A Bloomberg survey of 45 banks and brokerages set the euro at $1.40 by January and $1.34 at the end of 2008.

Technical analysis, popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896, is based on the theory that a chart of the price of any asset or index contains clues about future movements.

Those indicators watched by traders say the euro is becoming too expensive. The currency’s 14-day relative strength indicator reached 80.65, almost double a month ago. The gauge measures the momentum of price changes. Readings above 70 and below 30 indicate a reversal may occur.

The euro dropped 3.2 percent in the five weeks following the last time the index passed 80 in December 2006. It fell 3 percent in the seven weeks after the index exceeded 70 in the last half of April, and the currency tumbled 3.5 percent in the three weeks after it topped 75 in late July.

“Most technical indicators — stochastic, momentum or relative strength — are telling us the euro is extremely overbought,” said George Davis, chief technical analyst at RBC Capital Markets in Toronto. “The prospect for a short-term correction is getting bigger every day the rally is sustained.”….

Trading envelopes, which measure how far from the mean a price has strayed, and commodity channel indicators showing when a currency is overbought also suggest that the euro has reached extreme highs.

Goldman Sachs Group Inc. advised investors last week to sell euros bought since Aug. 16 because indicators show “the probability of consolidation is quite high,” said Jens Nordvig, a New York-based strategist at the firm.

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