U.S. Dollar Awaits FOMC Decision

INDEX:DXY   U.S. Dollar Index
Some say this week's FOMC decision will be of historical proportions and be the first time the Federal Reserve will increase the Fed funds rate in almost a decade.

The U.S. dollar index             is in a descending trend. Price action is floating above the minor trend created by the top on April 13.

The dollar has not been able to see any significant support higher, likely due to the uncertainty about the Fed's policy. The economy is clearly slowing down, and the Fed has never hiked rates into a slowing economy.

Furthermore, financial conditions are already tightening in the wake of a potential boost - if we can call it that -in interested rates.

According to Goldman Sachs' financial conditions index, which incorporates equity prices, exchange rates, credit spreads and a slew of other factors, hit the highest level in five years.

In regards to what is already occurring with a stronger dollar, increase in borrowing costs and declining asset prices, the market is already undergoing what feels like a 75 bps             increase; a 25 bps             hike from the Fed would only add insult to injury.

Technically, rallies in the dollar have been sold. Price action did see significant pressure in late August and broke key technical support. There was support near 92.50, but the mere close below signals the potential for further weakness.

If the Fed remains dovish this weak, and the FOMC minutes continue to be vague and confusing, the dollar could very well retest this year's lows.

Momentum on the longer-dated charts are suggesting that upward movement is challenged, and the trend could be changing.

Of course, if the Fed did come out and increased rates, the dollar would significantly strengthen. The idea that the Fed would allow that is flaw because they are begging for any sign of inflation in a deflationary world.

Multinational corporations have been greatly hurt with the dollar rising against nearly all currencies, and emerging market currencies collapsing. A $3 trillion debt crisis could also occur if the Fed embarks on a path towards monetary tightening.

The idea that the Fed can just tighten once and be done with it is foolish. That's not monetary normalcy, and the Fed would only prolong the inevitable.

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