NEW YORK, Oct 27: Rumours of the demise of the US dollar’s six-year bull run may be greatly exaggerated.

Even though the dollar is down about 4 per cent from July’s 15-year high on a trade-weighted basis, the US dollar index is well above lows hit immediately after the Sept. 11, attacks on New York and Washington. Analysts said on Friday that the index a measure of the greenback’s broad-based strength stands ready to resume its bullish trend.

Currently trading just below 116, the US dollar index is a basket of currencies of the United States’ major trading partners. It is tracked by many analysts who consider it a useful gauge of current developments and future trends in the dollar.

According to chartists, the dollar index traded on the New York Mercantile Exchange is primarily comprised of the Canadian dollar and European currencies such as the euro, sterling and Swiss franc while the remainder is largely Japanese yen and other currencies.

This week, the greenback pressed to multi-month highs against all major currencies, recovering from its steep losses in the wake of the Sept. 11, attacks. From a technical perspective, most chartists say the dollar has caught its second wind, and at the very least will retest its July peaks around 120 by year’s end.

We’ve been in uptrend since the early 1990s and we haven’t done anything to break it, said Thom Warden, technical analyst at HSBC Capital Markets. Once the correction is over and I think it is we’ll trade higher.

Keith Raphael, president of Crosscurrents Investment Advisory in Connecticut, sees the index puncturing a key technical resistance level around 116.20 as soon as next week. That in turn will touch off a 2 to 3 per cent rally that will carry the index within view of its July crests, he says.

HSBC’s Warden agrees, saying he expects the index to trade above 118 by next week.

In recent sessions investors have unloaded positions in European currencies that they picked up after Sept. 11, buying back dollars as expectations flourished that policy prescriptions in the US would help mitigate the effects of a looming recession in the world’s biggest economy.

For that reason, chartists are underscoring an increasingly constructive picture for the dollar.

When we get these moves where European currencies strengthen...it tends to take some of the wind out of the dollar index, said Crosscurrents’ Raphael. But recently we’ve been getting a breadth of (upward) movement in the dollar, and the index has quickly followed suit.

On Tuesday, the dollar index hit a 2-1/2 month high.

After breaching the 116 level, Raphael sees the index consolidating below 119 in the short term. But before long, he predicts the euro will resume a prolonged downtrend, which he says will take it past last year’s record low of 82.25 cents, perhaps as low as 76 cents.

This, he added, would be the principal catalyst of a return to the market’s halcyon strong dollar days.

With that kind of move below (the euro’s) current record low of 82.25 cents, you’re essentially talking about...the dollar index point for point trading up to 127 into the second quarter of next year a 20-year high, he said.

But others see it differently. In noting the close correlation between the US dollar index and the major stock indices, Merrill Lynch analysts say the dollar’s fortunes have largely hinged on US equity markets.

While US stocks surged above pre-Sept. 11, levels this week, the trend may not last.

So far, the US dollar index has tracked the recent liquidity-driven rally in the equity market, said a Merrill Lynch research note on Friday. However, this rally...is vulnerable to disappointment if the V-shaped economic recovery which is being priced in fails to materialize, the note cautioned.—Reuters