Several weeks ago we took a long look at the U.S. dollar. Specifically, we examined how the dollar was weakening against the euro, the yen, and almost every other currency out there. At the time, the euro/dollar conversion rate was 1.2925 (a multi-year high back in November). Between the election coming to a decisive close and the fact that "the dollar couldn't possibly get any weaker", many pundits were predicting that we'd start to see the dollar finally rebound. Never being one to avoid taking a contrarian view -- especially when the chart is in agreement -- we sided with the less populous camp that felt the dollar was still weakening. Sure enough, by the end of the year, the euro/dollar conversion rate would hit 1.366. It was a bit vindicating, but that wasn't even the point. We were just looking at a chart, and the chart said the dollar was still headed south. In January, the dollar started to rebound again, and sure enough, we once again saw the wave of pundits that were certain this time would be the recovery. And almost like clockwork, the dollar has once again started fall, trumping all those bullish predictions. Let's take a look.

On our first chart, we're plotting the euro/dollar conversion rate. You might be wondering why it's rising when the dollar is supposed to be getting weaker. Well, basically, this is a plot of the euro in comparison to the dollar - not the other way around. When the euro is relatively stronger than the dollar, our chart rises because it's still technically a 'weak' dollar.

In any case, the chart tendency is pretty clear. There's a surprisingly consistent ebb and flow, but there's also a clear pattern of higher highs and higher lows. You don't have to be a rocket scientist to figure out that this is the result of a euro that is strengthening and/or a dollar that is struggling. It's also obvious that the uptrend here is still very much intact. In fact, even if the chart starts to roll over (which it hasn't), there's still a lot of ground to give up before that uptrend is broken. The broad black line is our 'bigger picture' support level, and it's currently at 1.26. Until we actually break under that support, we'll assume that this trend is going to steer this chart upward.

The red and green lines are 100 day and 200 day averages, respectively. As you see, the euro/dollar exchange rate crossed above the 100 day average this week. Historically, such crosses have been omens of a surge to new highs. While some people laughed (back in November) at our idea that this conversion rate could hit 1.40, it now seems unlikely that it wouldn't. We were less than four cents shy of there just two months ago, and the momentum looks to have been renewed.

Euro/U.S. Dollar Exchange Rate - Weekly


We didn't set a target conversion rate for the yen like we did the euro, although it wouldn't have been difficult. The behavior of the dollar/yen exchange rate has been almost identical, and barring any incredible tinkering, will probably continue to mirror the euro/dollar conversion.

The key difference here is the direction of the chart. In the case of the yen, we'll plot a dollar/yen exchange rate, which means the chart will rise as the dollar strengthens against the yen, and fall as the dollar weakens. You'll note that for both charts, extremes were hit at about the same time. You'll also see that there's a primary guide line for both charts (black). For the dollar/yen chart, that resistance is at 108.8. As long as that resistance holds, the dollar's downtrend will stay intact.

There is a key difference here, though. This chart seems to be finding some support around 101.50. That's where we saw the most recent bounce, and it's also the low from late 1999. All the same, the chart is clearly pointed lower.

U.S. Dollar/Yen Exchange Rate - Weekly


And the point? There are two. The first point is that the dollar is still weakening. We are much closer to the condition that will ultimately reverse that trend (a Fed Funds rate at least as high as inflation), but we're not quite there yet. The second point is that the charts don't lie. Charts are one of the few tools that incorporate all known data as well as all opinions of that data. When the dollar was actually weakening in November even as the majority of the market said it should be strengthening, that should have been a major red flag. If the dollar was supposed to recover, why was it that nobody wanted anything to do with it? This week, we're seeing that same setup once again.

And by the way, we do want to stress that a weak dollar is not inherently a sign of a weak domestic economy. In fact, in this case, a weak dollar should be a blessing for U.S. companies that have a lot of exportable goods and products.

Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education.