Dollar Index (DXY) Bottoming Out – Watch Out for the Almighty Dollar’s Comeback

US dollar index
US dollar index

There was much talk about the Dollar Index (DXY) these days as the almighty dollar was sold across the dashboard. All major currencies gained against the dollar lately – EUR, GBP, CAD, AUD, CHF, to name a few.

Many voices call for the demise of the dollar and the current financial system. After all, the dollar sits at the core of it, with its world’s reserve currency status.

The Fed easing did the trick. Since the COVID-19 pandemic started, the Fed lowered the funds rate close to zero and restarted the quantitative easing program.

As a consequence, the Fed balance sheet started to increase again. Only this week, it reached $6.96 trillion dollars due to a rise in SOMA account from quantitative easing purchases.

But all the Fed easing is lately offset by the Treasury’s issuance of new debt. The Treasury balances at the Fed sit at a record $1.78 trillion, a sign that international demand for newly issued debt by the Fed (and implicitly for dollars) is still alive and kicking.

In other words, the USD liquidity in the financial system shrank lately – a positive for the Dollar index by all means.

Before discussing the technical aspects, one must remember what the Dollar index stands for. It represents a basket of currencies, where the EUR dominates with a weight of over 50% of the index. In other words, when looking at the Dollar index, one keeps in mind that EURUSD pair too. Literally, the two assets are inversely correlated, with little deviations seen in time.

Dollar Index Technical Picture

DXY reversed from a non-limiting triangle, just like the EURUSD did. However, on the break lower, the Dollar index failed to retest the triangle’s lower trendline, a mandatory condition for such a triangle.

Moreover, the recent levels for the index, around 95, makes it possible to see a double top forming next. Of course, it is too early to tell as we need a bounce before anything.

In any case, at this point, shorting the Dollar index or remaining short on the dollar comes with increased risks. Dollar bulls may want to see a move back above 96.5 before going long for the triangle’s trendline testing, with a stop-loss at the double bottom’s low.

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Dollar Index Forecast

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