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DXY: No End in Sight for the US Dollar Index Tragic Freefall

US dollar index

The US dollar index (DXY) crashed to the lowest level since 2018 as global risks eased. The index is trading at $91.20, which is the lowest it has been since April 2018. This makes the greenback the worst-performing major currency in the world.

There are three primary reasons why the dollar is struggling. First, yesterday, politicians in Washington made some progress about stimulus. Yesterday, a bipartisan group of senators proposed a limited $900 billion spending package that will help cushion the economy before Biden becomes president.

Such a stimulus is negative for the dollar index because it means a swift recovery of the American economy; thus eliminating risk.

Second, the DXY is falling because of the probable Covid-19 vaccine, which means that the world will possibly continue its recovery in the coming year. The vaccine has led to a risk-on sentiment, which has seen more investors move to relatively riskier currencies.

Finally, the dollar index is at a two-year low because of the possibility of more stability once Joe Biden gets into power. Based on his policies and the team he has put in place, the president will prioritise rebuilding America’s relationships with allies like Mexico, Europe, and Canada.

US dollar index technical outlook

Turning to the weekly chart, we see that there is no end in sight for the dollar index weakness. It has dropped by more than 11% from the highest point this year. The price is below the 50-week and 25-week exponential moving average while the Relative Strength Index (RSI) has moved close to the oversold level of 30.

Therefore, with bears solidly in control, I suspect that the next stop will be at $88.13, which is the February 2018 low. This trend will be invalidated if bulls manage to push the index above the psychological level of $94.

DXY technical chart

Dollar index