The US Dollar Index (DXY) declined for the second consecutive week. It even dipped under the 98.00 level, touching a low not reached in two weeks. This decline is just one front in the broader war on the USD. As the federal currency of the United States, the USD has remained one of the most traded and influential currencies in global markets. With every new economic announcement and political speech, the reemergence of the USD’s long-term performance makes those with investment decisions to make nervous.
The DXY has shown resilience, managing to stay above the multi-year low of 96.40 touched earlier this month on July 1. Industry experts and advocates are eagerly anticipating the next steps. Should the dollar break below the important level of 96.37, it may indicate further weakness ahead, with support levels at 95.13 and 94.62 if the decline continues.
Recent Performance of the US Dollar Index
The US Dollar Index has become a focal point for traders and economists, particularly as it extends its recent slide. The market sentiment is changing as it drops to two-week lows. This shift is driven by many forces, not least of which are Federal Reserve dogma and political rhetoric.
On a technical note, the DXY now has first line resistance at the August peak of 100.25. Any solid advance above this threshold might see the index retake some serious ground. This bullish momentum could target levels such as 100.54 and the high of the May peak at 101.97. If the index continues to falter, the long-term effects on the dollar’s value could be dire. This would have serious implications on its status on international markets.
This drop is more than just a statistic. It further points to the overall economic environment and showcases investor sentiment towards the US market. With the global market dominated by the USD, the dollar accounts for over 88% of all foreign exchange turnover. In just 2022, daily transactions denominated in the dollar topped an astounding $6.6 trillion on average.
Economic Indicators and Federal Reserve Influence
Recent statements by Federal Reserve Chair Jerome Powell have further abbreviated the picture on the dollar’s outlook. Powell went on to describe the labour market as “pretty much at full employment,” indicating that we can expect some stability in employment metrics. This wave of optimism is being countered by increasing concerns over a more politicized Federal Reserve as President Donald Trump takes office. In doing so, he has initiated unprecedented debates about the central bank’s independence.
At all these meetings, Federal Reserve officials are staking out a position. Vice-Chair for Supervision Michelle Bowman and Governor Christopher Waller—Trump appointees—are calling for a 25 basis point cut now. Besides providing immediate liquidity, these measures can change the trajectory of interest rates. Consequently, they can influence how attractive the US Dollar is to investors seeking yield.
Market participants have one eye on the proverbial storm and one eye on how these factors converge. A possible future rate cut would add to that risk, further undermining the dollar’s value. This could occur if it increases fears of inflation or the outlook for long-term economic growth.
The Global Standing of the US Dollar
The US Dollar has immense power outside of America’s borders. It is essential linchpin of international finance and trade. The USD has, since overtaking the British Pound as the world’s reserve currency following World War II, established itself firmly. Today, it is still the most traded currency in the world.
Countries across the world have started using the USD in conjunction with their native currencies. When the USD fluctuates, there can be major ripples through global markets. The US dollar’s strength or weakness can have an outsized impact on issues ranging from the price of commodities to the decisions of cross-border investors. Given the geopolitical tensions and economic uncertainties coursing through the world, that tentatively leaves the question on what these dynamics will mean for dollar performance going forward.
Today, the US Dollar Index sits under its 200-day simple moving average of 103.00. It has dropped below its 200-week simple moving average, which is at 103.13. Such positioning begs the question of whether its historic ability to rebound can withstand today’s outside forces.