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The U.S. dollar index peaked on Jan. 3 of this year and has been locked in a bearish trend ever since.

While domestic export companies might cheer the trend, as it makes U.S. goods cheaper overseas, a breakdown in the buck could signal serious warnings.

If the economy is supposedly strong enough for the Federal Reserve to reduce its balance sheet and begin to raise interest rates, why is the dollar falling? A stronger U.S. economy should attract investment from abroad, and that means there should be an increase in the demand for dollars.

I defer to the economists to ponder this question. When it comes to the charts, though, the dollar is fast approaching a do-or-die level (see Chart 1). If it falls below it, there is a lot more room for it to fall before a meaningful floor can be found.

Chart 1

The U.S. dollar index represents the value of the greenback against a basket of other currencies. It is trade-weighted, so the euro represents about 57% of its value, followed by the Japanese yen at 14%, and the British pound at 12%. Investors can monitor the index via the PowerShares DB US Dollar Index Bullish exchange-traded fund (ticker: UUP)

If we look at the long-term chart of the dollar index, we will see crucial support in the $92.60-$93.15 area (the index traded at $93.99 Monday afternoon). This is defined by the bottom of the trading range that has been in effect since early 2015.

Shortly after the November election, the index poked its head above the range in what looked to be a major upside breakout. It successfully tested that move when it dipped lower to give late bulls one more chance to buy in December.
However, by January it became clear that the breakout had failed. In technical analysis, a failed bullish signal often becomes a bearish signal—as proved by the index’s run back down to support levels. But that may not be the end of it. Unless that support holds and the market turns around rather soon, the odds will favor the bears for the next year or so.
The euro, thanks to its very heavy representation in the dollar index, has an inverse look on the charts and is now approaching a critical resistance level.

The yen’s chart is a bit more cryptic, with more of a sideways path than a trend threatening to make a big move.

However, the pound is clearer as it trades at a critical feature on its chart (see Chart 2). Using the CurrencyShares British Pound Sterling Trust ETF(FXB) as a proxy, we can see it challenging short-term resistance from a 10-month range—and it is not far from the declining trendline drawn from the major 2014 high. This line runs right through the high set on Brexit voting day June 23, 2016.

Chart 2

The British pound ETF has already regained one-third of what it lost following the Brexit vote and has been rising since March. It would not take much to spark an important upside breakout and send it all the way back to pre-Brexit levels.

The Canadian dollar, at about a 9% weighting in the dollar index, has already broken through its long-term declining trendline to the upside (see Chart 3). This is more bad news for the greenback, and we can see the CurrencyShares Canadian Dollar Trust ETF (FXC) has only one more major hurdle to overcome before it confirms a major bull market versus its U.S cousin.

Chart 3

The bottom line is that the U.S. dollar shows pending problems against major European currencies, and in separate charts we can see strong short-term rising trends in the Australian dollar, Mexican peso and Brazilian real. The greenback has very little room to maneuver before its registers a major breakdown.
Michael Kahn, a longtime columnist for, comments on technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.