The US dollar is poised to extend last year's rally. The US economy is at least several quarters ahead of most of the other major economies. Barring a major surprise, the federal reserve will likely hike rates around the middle of the year, while the economies in Europe and Japan need more stimulus.
In the week ahead, investors will likely learn that the euro zone and Japanese economies continue to struggle, while US job growth continues. There are preliminary signs that labor costs are beginning to rise, helped by rising wages. This is expected to continue to underpin US consumption.
Still, it is unreasonable to expect the US economy to maintain the 4%+ pace seen in the April-September period. It also seems unreasonable to think that the drop in oil prices, lower interest rates, and weaker currencies will not have a positive impact on Europe and Japan. It will take some time. In the meantime, the divergence theme is the focus and this bodes well for the greenback.
The US Dollar Index has established a foothold not only 90.00, which was a post-Lehman cap., but closed the week above 91.00. The next important target is near 96.00. Further out a move toward 101-102 should not be ruled out.
The euro is poised to bust the $1.20 support area. A break targets $1.1875 and then $1.1650 over the medium-term. More immediately, counter-trend bounces toward $1.2130-50 will likely be sold. The greenback closed the week above CHF1.00 for the first time in four years. Although there is some nearby resistance in the CHF1.0070 area, the next important target is near CHF1.1360.
The dollar's down draft against the yen that saw it dip below JPY119 on December 30 was a bit of a fluke. Blame it on thin markets. The move seemed sufficient to wash out the weak dollar longs. As they re-build, the dollar will re-test the multi-year high seen earlier in December near JPY121.85. Above there, technicals point to JPY124.15, the high from 2007, and above there JPY125.00-60. Support is seen in the JPY119.40-60 area now.
