Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

The Dollar May Be About To Push A Lot Higher

Published 04/09/2020, 11:47
Updated 20/09/2023, 11:34

This article was written exclusively for Investing.com

The Dollar Index has declined sharply in recent weeks, as US government spending soars and rates on the 10-year US Treasury sink. It has resulted in the euro surging to as high as 1.20 to the dollar. Since peaking on March 19, the Dollar Index has slumped by nearly 10%. However, those significant declines may be over.

The big shot across the bow may have come from the ECB's chief economist Philip Lane, who noted that the exchange rate of the euro matters to the health of the eurozone. When the ECB instituted a negative interest rate policy in 2015 and 2016 under Mario Draghi, it resulted in the single currency weakening versus the dollar to nearly 1.05, rallying briefly to around 1.20 to the dollar in 2018, and then sinking again.

However, it was those aggressive monetary policies that suppressed and kept the euro low versus the dollar and close to parity.

EUR/USD Daily 2013-2020

More Aggressive Monetary Policy

Now, Draghi is gone, and the euro has surged to around 1.20 to the dollar as the Federal Reserve has gotten very aggressive with monetary policy to fight off deflationary forces from the coronavirus-induced recession. If the ECB is intent on reducing the exchange rate, it means that more aggressive monetary policy is likely to come, and that would mean the dollar is likely to strengthen as a result. A weaker euro helps to boost inflation and growth across the eurozone, while also helping to make goods more competitive abroad, assisting the eurozone's export economies.

A Bottoming Pattern

If a more aggressive monetary policy does come from the ECB, then it is likely to result in a longer-term move higher in the US dollar. The technical chart even suggests that a reversal may be in the works.

The DXY has seen its relative strength index fall well below oversold levels at 30, all the way down to 18. Now that RSI is starting to rise and has been steadily trending higher.

The rising RSI, while the value of the index has been trending lower in a trading channel, creates a bullish divergence and indicates a dollar reversal higher may be on the way. It suggests that momentum in the Dollar Index is shifting from a bearish to bullish trend.

Should the Dollar Index rise above 93.75, it is likely to result in a further push higher to around 96. It could be the start of a longer-term reversal higher.

A longer-term surge in the dollar would create potential issues, especially for risk assets and assets linked to inflation.

DXY Daily

Inflation Linked Assets Could Struggle

Gold would be one such asset class that could suffer significantly after its 32.7% rally since the March lows. The precious metal’s big advance has come as some investors have sought its safety as a store of value and as a hedge against inflation pressure. With the dollar rising, it would damage the prospect for inflation surging and reduce the need to hold gold as a store of value.

Should the dollar’s bottom be in place, it will likely come at the hands of the central banks, such as the ECB taking on more aggressive monetary policy. Just how far the dollar can rally will largely be dependent on how far that monetary policy is pushed and more importantly how the markets respond to it.

Latest comments

what I say is how markets go, mine is final word. hagahaga
no comments
Obviously, what fed has done is a game that all the rest of the major central banks can play; may be with lesser intensity. But move towards parity is always a given. Dollar will claw back.
dollar will go up and up and up until bonds stop going down. gold is pointing towards 1900, them 1800, ...., then 600
DXY is measured against other currencies that are losing value. Gold will rise
it can go up yes...but don't mess with the FED. They can jump into the market and start buying stocks and weakening the dollar as never before
Dollar Index likely to nosedive at 83.33 levels in the wake of a another stimulus.Do not get surprised.
Agree strongly. Also applies to GBP. Brexit and covid will require more easing from BoE weakening Sterling.
What rubbish.
USD will definitely go down before US elections. If not US stock market will collapse because of strong USD. FED &Trump will never allow a matket crash before elections.
Just do the opposite to what this man says!
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.