Once again, we see that it pays not to get too excited about some stupid rally in the dollar, especially when the supposed cause of the rally– a rise in the yuan lending rate?? — flouts common sense.  With DXY’s relapse yesterday, this vehicle all but wiped out any chance it had of demonstrating that technical forces are about to turn the doillar sharply higher.  As I had noted here earlier, the rally needed to surpass two prior peaks on the daily chart without taking a breather.  It did manage to get past one of them on Tuesday, but the would-be sprint toward the second that was to have occurred yesterday was exhausted before DXY had even left the starting gate.

What on earth would cause anyone to think the dollar is going to rally merely because a rally seems “overdue”?  Even as I write these words, a story on the evening news is describing the deep spending cuts Great Britain is enacting to bring expenditures more realistically in line with tax revenues in these hard times.  Similar measures are certain to be voted across Europe — and yet, with the U.S. pondering QEII and yet another Keynesian blowout, are we to expect the dollar to somehow gain ground against the euro and other currencies managed by a growing number of nations that have begun to question the value (in every sense of the word) of ginned-up money. 

From a purely technical standpoint, the Dollar Index still has a chance to take on peak #2 without having paused, since yesterday’s plunge did not quite create a discrete, point ‘C’  low on the daily chart (see inset). Such an outcome seems doubtful, however, notwithstanding the violence of the gratuitous moves both up and down that could conceivably play out for yet another day or two.  Barring an outbreak of dollar delirium, I’ll hold to my earlier forecast of a test of last December’s  74.17 low and, eventually, a more crucial test of support at currency-dom’s Maginot Line: 70.