The US dollar could be just at the beginning of a major upwards trend against major currencies that could last several years.
The US dollar index, which is a geometrically averaged calculation of six currencies weighted against the US dollar, was created by the Federal Reserve in 1973 at the end of the Bretton Woods system of fixed exchange rates. The index provides an external bilateral trade-weighted average of the US dollar against global currencies. The components of the dollar index are: euro, 57.6 per cent; Japanese yen, 13.6 per cent; UK pound, 11.9 per cent; Canadian dollar, 9.1 per cent; Swedish kroner, 4.2 per cent; and Swiss franc, 3.6 per cent.
The chart shows that the US dollar index recently broke above an important long-term resistance at the 85-86 point level. Such breakouts from long-term consolidation periods are usually very powerful and tend to be followed by strong trend periods in the direction of the breakout. A sustained period of trading above the 85-86 level would therefore be a bullish signal for the US dollar, and could well usher in a multiyear rising trend. The next major resistance is at just over 100 levels.
Such a scenario is likely to have important implications for other asset classes.
Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD
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