Does a Dollar Breakthrough Signify Impending Disaster For U.S. Markets?

Today the euro is getting crushed versus the U.S. dollar, currently trading down 1.8% on the session to 1.40118. More importantly, the dollar is closing in on the key resistance level of $1.40. This is significant because over the past 18 months, U.S. indices have risen and fallen based on the happenings of the world currencies market – more specifically, on the happenings of the EUR/USD. History, at least recent history, has told us that when the dollar falls, indices rise, and when the dollar rises, indices fall. That is why the impending breakout of the U.S. dollar is such a cause for major concern amongst traders and investors. The dollar's potential breakout could lead to a dramatic downside move for U.S. indices, as well as wreak havoc on other major markets throughout the world, potentially leading to the much talked about, and much feared “double dip.” As the magnified one year daily chart below shows, the $1.40 area has served as a major area of support for the Euro going back to March 28th, 2011. Over the past six months, that level has been tested, and has held firm on five occasions.

Should this level be broken, the EUR/USD could quickly slide down to its next area of support at $1.375, and beyond that at $1.3427. Such a plunge could mean significant pain for investors, as U.S. indices with almost certainly get trounced on the move. If you prefer ETF's, use the PowerShares DB US Dollar Index Bullish

as your guide. The area of resistance to watch is $21.86. The ongoing debt limit talks in Washington D.C. will undoubtedly have a significant impact on the world currencies markets, but if things continue the way they are, the action does not bode well for U.S. markets in the near term. Time will tell.