Dollar Index Futures: Euthanasia of the Dollar

US Dollar Index Futures: Last week, the tug-of-war between the dollar being a good or bad investment was still vague. Today, the winner is certain. The Fed has once again made it clear… they will sacrifice the dollar to save Wall Street. Their latest gambit is an estimated $700 billion bail-out package to buy junk-status mortgages from troubled financial institutions.

It looks like the latest advance in the US Dollar Index (an $8,820 move in the futures from a low of 72.08 on 7/15/08 to a high of 80.90 on 9/11/08) is about to end. The long-term downward pressure is beginning to resume.

Look out below
An explosion of commercial shorts in the last few Commitment of Traders reports were offset by the large speculators group.

In the 9/12/08 Commitment of Traders report, the commercials were short 62,563 contracts (green line). The trade was offset on the long side, mostly by the large speculators holding 40,724 contracts (light blue line), combined with commercial longs holding 27,121 contracts (grey line).

The latest COT Report, data from 9/19/08, which became available last night (9/22/08), shows a significant change in open interest by the commercials. They closed out 20,109 contracts on the short side (green line) and 20,176 contracts on the long side (grey line).

What interests me the most from this chart is that the large speculators (light blue line) stopped adding to their long position. These large speculators are mostly trend-followers. I would not be surprised to see them start getting flat and eventually short if the current price-level continues to break down.

Look for the move to test the old support in the 72 price range (purple line). The 72 price level should also be an area of significant stop orders.

The recent volatility in the Dollar Index makes it a very dangerous market for the amateur trader. For traders taking positions, make sure you use a disciplined approach with a defined exit, as well as strict risk and money management controls.

There is substantial risk of loss in trading futures and options.

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