It isn’t the Russians or Chinese who Dollar Holders should worry about…

China wants a new world reserve currency. It is sick and tired of being forced to peg its currency to the perilous U.S. dollar.

Wait a minute! Didn’t the Chinese volunteer to take all those dollars off our hands in exchange for cheap cotton t-shirts and counterfeit Britney Spears CDs? And haven’t we been arguing for years that they really ought to send a few of those dollars back here to the States by buying a few of our tractors and such?

As to why we want Britney Spears CDs so bad in the first place, that is another story – indeed another column – altogether.

“Hey Baby: Let’s Mortgage the House and Eat Steak Tonight”

Russia wants a new world currency too. Of course, Russia also wants its citizens to stop drinking and gambling, and its supermarkets to charge less for meat. Unofficial Supreme Leader Putin went on about it at some length the other day, complaining that all such activities simply played into the hands of organized crime.

Apparently, some of the greybeards in the Kremlin are nostalgic for the good old days when steaks were priced at a mere ruble or two. I say “priced” as against “sold,” because Russian grocery stores were infamous in those days for never actually having any steaks to sell. Or bread for that matter. For such delicacies as real beef or fresh bread, Russians had to go the black markets, which were, of course, run entirely by organized crime.

To all these efforts I say: “Good luck with that, but pardon me if I don’t hold my breath.”

Permanently Corrupt

Now I don’t doubt that someday the dollar will get kicked off its perch as the world’s top currency. In 20 years, we may very well see the daily price for oil ticked off in, oh, I don’t know, Icelandic kronas or Saudi riyals or some such nonsense.

But it won’t be some outsider who single-handedly pushes us off the top of this grand pyramid scheme that is the dollar. And most certainly not the internally rotten Chinese or Russians.

When I look at the present and squint toward the future of these two, I can’t help but be reminded of poor corrupt Italy, its permanent tithe to the Mob eternally sabotaging its yearnings for empire.

Hoist by Our Own Petard (Trust Me: It Hurts!)

That doesn’t mean we are not headed for a tumble. Just that whoever finally knocks us down will most undoubtedly be assisted by our own horrid proclivities for debt and debasement.

And while the world’s finance ministers grandstand at various “G-This” and “World-That” meetings, the first half of 2009 (2009 – I’m sorry, but it still feels weird to write that!) has come and gone.

So just where is the dollar headed for the rest of this year? As mentioned in previous columns, the vast majority of the Obama Stimulus monies have been bottled up in Washington. In the second half of the year, you will see that dam break, and a veritable flood of cash pour out into State budgets.

The Wiseguys Head for the Exits

Unfortunately for the poor dollar, I am not the only one who knows this. Looking to the dollar futures charts one can see numerous sell signals. Let’s take a look at a few.

We’ll begin with the simplest, and most intuitive: the Broken Trend. From July of ‘08 to March of this year, the index gained some 24% as the banking crisis caused dollars to vanish from the scene. But last May, we saw that rising trend break as the first waves of Washington’s cash flood began to lick the shore.

A Short-Term Stall

In the weeks since that initial breakdown, we have seen a bit of a pennant pattern as folks fret about just how slow Washington has been with its disbursements, and whether or not the Russians and Chinese can break the dollar.

This sort of stall is actually a relatively common pattern. I have marked three other similar short-term consolidations on the dollar index chart. Note that two out of three resulted in continuations of the previous trend.

A broken rising trend is a clear confirmation that traders have already sought the exit. But you have to take things a step further if you want some kind of indication as to where things are headed.

A Classic Head and Shoulders Failure

The Head and Shoulders pattern is a perennial favorite amongst technical analysts. It is, in essence, simply an extension of the idea of the Broken Trend:

• The Left Shoulder and Head are two successive rising tops.
• The right shoulder is a lower third top, an intimation of failure.
• And the broken neckline is the confirmation that the breakdown is under way.

Once that neckline is broken, I generally credit 2-1 odds that the breakdown will continue to the final target, which is obtained by doubling the drop from the head to the neckline. In this case we are looking for the dollar index to drop to 72.09, an additional breakdown of 9.3%.

Welcome to Back to the Swamp

It is popular amongst skeptics to call this sort of stuff “tea leaf reading.” Good for them; I wouldn’t want to live in a world without skeptics.

And certain technical patterns are irritatingly subjective. For example, I have long since given up trying to determine the difference between various Elliot Waves.

However, I should like to point out that the H&S pattern has been repeatedly tested and confirmed by statisticians as the closest thing to a legal “lock” you can find in this business.

And it is alarmingly reassuring to note that this particular H&S pattern has indicated that the dollar index is simply slated to return to its recent lows at or around 72.09. This is not the perilous cliff that China and Russia watchers are warning of. Rather it is the stinking swamp that we have so blithely and willingly decided to call home.

Other Related Topics: Adam Lass , China , Currency , Dollar , Russia , WaveStrength Options Weekly

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