In a substantial shift, the US dollar has gone on a downward death march, falling back across the board and suffering daily declines since last Monday. This discouraging development comes on the heels of disappointed expectations for a bounceback. Consequently, the first half of 2023 has been the currency’s worst stretch on record since 1973. The dollar’s recent total losses of more than 12% during this span—inflicting great damage globally—has rattled investors and policymakers out of their near complacency.
As mentioned beginning the second half of last week, the US dollar index has made over three-year daily lows almost every trading day since. This decline signals a troubling trajectory for the currency, although experts note that its current situation is not as dire as it was in Britain in September 2022. The dollar might be heading in a more fundamental direction, causing alarm bells to get louder about its future stability.
The RSI, an oft-followed dollar index technical measure, has recently reached multi-year lows not seen since early 2018. This represents a historic, seven-year decline, the deepest in recent memory. And today, market analysts are predicting a 65% chance that the Federal Reserve will make at least three interest rate cuts before the end of the year. This speculation is making the currency all the more vulnerable.
Besides these external factors, domestic U.S. policy is having an outsized impact on the dollar’s fortunes. One of the reimagined “One Big and Beautiful Bill” chapters calls for a no-more-than 7%-of-budget deficit goal. This step would upend market fundamentals and destabilize investor certainty. This week, exceedingly strong macroeconomic employment data dropped. Yet, it can provide him with some breathing space and prevent the current rout of the US dollar from going further.
Suffice it to say, the technical outlook is grim. Forecasters are calling for the dollar to fall another 7-8%, which would put it in the 88-90 range on the DXY index. Right now, the DXY is at 96.6, making it all the more important to get a handle on this downward momentum before it spirals out of control.
The reasons behind this decline are multifaceted. The slowdown of the global economy plays a major role in this. First, it diminishes the dollar’s demand as a safe haven asset. In a climate so hostile to its kind, it becomes almost impossible for the currency to make a comeback.