I continue to be amazed by the number of people calling for a bottom in the dollar when the signals being given by the dollar are not confirming a bottom any time soon.  A higher dollar is one thing that could delay the inevitable advance in gold, but in stepping back and looking at the bigger picture, the pieces are in place for the dollar to move lower and gold to move sharply higher which will still unbelievably catch many off guard.

There are two main reasons that a rally in the dollar is ‘expected’.  First, when the inevitable correction in stocks takes place, the dollar will supposedly soar due to its safe haven status as traders flock to the safety of the greenback.  .  Second, sentiment is so negative against the dollar (around 3% bulls according to Bloomberg) that everyone who planned on selling the dollar has done so.    

The safe haven status of the dollar is being seriously threatened by gold as traders are becoming uneasy about flocking to any of the fiat currencies.  The bigger picture issue, though, is the fact that foreign governments and businesses are now issuing bonds in U.S. Dollars, which will bring even more supply on to the market.  Entities in Spain, Germany, Abu Dhabi, Sweden, and Hong Kong are all issuing debt at rates higher than comparable U.S Treasuries as they are confident that they will make up the difference on dollar weakness.  China and Russia are also unloading their dollars in such a way as to not disrupt world currency markets which should keep a lid on any rally attempts for the dollar.  Is that how a world reserve, safe haven currency is treated?  I think not. 

In many instances, sentiment can be a useful tool in looking for change points, but negative sentiment in and of itself is no reason to run out and buy dollars.  Typically a catalyst is needed to spark a counter trend sentiment based rally, but with new dollar supply coming on the market seemingly daily, any rallies will have a mountain of overhead supply to overcome which makes a sustainable recovery doubtful.

The chart below of the U.S. Dollar Index shows a distinct downward sloping channel.  As the index price approaches the bottom of the channel, a technical bounce is expected, but given the increasing overhead supply of dollars, it should be short lived.  There is stronger support in the 74.30 – 74.75 area, but whether or not that holds remains to be seen.