DXY: Greenback’s Pullback May be Short-Lived
Matt Weller, CFA, CMT March 20, 2020 12:33 PM
There’s no asset in more demand than the US dollar when a financial crisis hits...
Like it or not, the US dollar is the world’s reserve currency and therefore, the axis upon which the global financial system turns. As traders try to adjust to the rapidly-changing global health and economic outlook as COVID-19 spreads, the US dollar has served as both a source of funds and the most demanded asset on the planet in just the last three weeks alone.
As we documented earlier this month, the US dollar index initially saw a quick 5% dump through early March as coronavirus broke out of China, driven by traders unwinding carry trades based around the relatively “high-yielding” US dollar. The world’s reserve currency then turned on a dime as the pandemic reached crisis levels at the start of last week, and as experienced traders will know, there’s no asset in more demand than the US dollar when a financial crisis hits.
As the chart below shows, the US dollar index exploded more than 8% higher trough-to-peak in less than two weeks to approach 103.50, which marks the highest level the buck has traded at in the last 17 years!
Source: TradingView, GAIN Capital
As of writing today, the greenback is actually the weakest major currency. Whether that’s due to the aggressive actions by governments across the globe, the Federal Reserve’s rapid easing and crisis-era responses to ease financial conditions, or mere profit-taking ahead of the weekend, the medium-term technical outlook for the US dollar remains bullish following the big breakout above the 100.00 level earlier this week.
For FX traders, there may be a short-term opportunity to bet against the buck for a short-term retracement toward that key 100.00 level (equivalent to the 1.08-1.09 range in EUR/USD and around 1.20 in GBP/USD). Longer-term though, traders who missed the initial breakout in the dollar index may view a pullback toward 100.00 as an opportunity to join the recent bullish swing at a better price for a potential move up to retest key resistance at 103.50.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.