By Chris Fournier Jan. 21 (Bloomberg) -- The Dollar Index traded above its 200-day moving average for the first time in more than eight months, indicating that the greenback may have the momentum to sustain a broader rally. The index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners including the euro and the yen, advanced to as high as 78.814, the strongest level since Sept. 2, breaching the 200-day moving average at 78.546. The index last traded above the 200- day average in May. It closed yesterday at 78.338. “People tend to look on the 200-day moving average as an indicator of long-term trends and market sentiment,” said George Davis, chief technical analyst for fixed-income and currency strategy in Toronto at Royal Bank of Canada, the nation’s largest lender. “It would certainly indicate that perhaps we’re starting to see a longer-term shift to more bullish sentiment vis-à-vis the U.S. dollar.” Davis cited concern over Greece’s finances weighing on the euro and a reversal of the so-called risk trade in which the U.S. dollar rises on positive economic news rather than falling as contributing to the sentiment shift. The euro fell below its 200-day moving average versus the greenback for the first time since May yesterday. “Breaking above here does suggest we should see a fairly strong performance,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “This is just another element of the building resilience of the dollar outlook in the short term.” Fed Expectations The greenback may strengthen to as high as $1.28 versus the euro by the end of the third quarter, Stretch said, citing a faster economic recovery in the U.S. than in other Western economies and markets “getting accustomed” to the prospect of the Federal Reserve raising interest rates in the second half of 2010. The 200-day moving average is calculated by adding the closing prices for the last 200 days and dividing by 200. As new prices are added, the older prices drop off. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a security, commodity, currency or index. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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