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Last weeks FOMC report came out within the expectations. As we forecasted, it turned out to be good for the Dollar. We have now seen significant moves in the Dollar against all of the majors. This Week we are expecting a small near term pullback in the Dollar which we will use to add to our long Dollar positions against the Pound, Euro and Swiss. We see the overall Dollar strength playing itself out sometime early in the New Year, so do not look to hold any of these trades for the longer term. Keep in mind that liquidity will fall almost daily until after January 3rd so many of the moves we see between now and then will be exaggerated.

The U.S. dollar index is an excellent barometer for monitoring the overall health of the U.S. dollar as it trades against the other major currencies. The March dollar index futures hit a fresh all-time low last month, and a downtrend line is still in place on the daily bar chart. See on the daily bar chart that just recently the dollar index has produced a short-covering bounce that has seen prices challenge the downtrend line, but so far fail to push above it. A solid push above strong technical trendline resistance that is now located at the 76.00 level, basis the March U.S. dollar index, would provide the bulls with fresh upside technical momentum to begin to suggest that a near-term market bottom is in place.

All this talk about the Dollar being dead is simply over blown. Any investor knows that the greatest trades come from being a contrarian. When the entire investment community says that the Dollar is going down you know it is time to buy. The Swiss Franc has been on a wild rally especially in the last week. A quick look at the chart below and you can clearly see that we rallied to the 2004 highs. We are expecting a macro turn back down from here and are advising readers to buy puts on the Swissy.

We made it through last week with most of the data coming out in support of the Dollar. At the same time the Dollar has yet to find a bid. So it looks like we will need even more of a catalyst to turn the dollar up. The next major event will Thursday's ECB rate decision. If they hold rates steady that could in a round about way support the Dollar if the raise rates then look for the Dollar to make new lows. Overall these markets have become very data dependent and this usually happens in near the end of a trend. Keep trailing your stops and be ready for a fast countertrend move.

This is a trade on tomorrow's G7 meeting. The European Union has publicly stated that the appreciation of the Euro against the Dollar is becoming an ever increasing problem for its exports. Part of the discussion at the G7 meeting will be how to deal with this issue and our sources tell us to expect the Europeans to push hard for stabilization of the Dollar. Today we saw the Dollar index hit new 40 year lows, so with this trade we are obviously bottom fishing but by keeping risks below $300 we feel the potential reward far out weighs the risk. If the Dollar does in fact stage a bounce we are targeting a move back up to at least 80.

We continue to patiently wait for more strength in the dollar. As I have mentioned in past issues we are not looking for a macro change in trend but really just a dead cat bounce. We have seen the Dollar bounce already but it has so far been unable to follow through. We expect follow through this week off of either the CPI data to be released on Wednesday or Friday's G7 meeting.

The major theme for this week is a dead cat bounce in the dollar. While we are in no way bullish the dollar we do see it staging a dead cat bounce in the not too distant future.

Europe
Euro, Pound, Swiss Franc

The Euro has seen a very strong run up past the 142. Last week we had expected this pair to stall and form a bull flag pattern. We were clearly early in that call. We do expect the stall to come by the end of this week. Continue to trail stops on long trades but I would not chase this market if you are not already in.

The Fed. did surprise the investment world with its .50 rate cut last week. The reason we are in the mess we are in is low interest rates, so could someone please explain to me how lowering rates is going to fix this problem? The FOMC is supposed to be primarily concerned with inflation. Gold near all time highs, oil at all time highs, wheat at all time highs, and yet our government reports that inflation is not a problem!? What ever they are smoking up there on the hill must be good because you really have to have your head in the clouds to argue that inflation is not a problem.