The US Dollar Index (DXY) continues its bullish recovery. It now trades at about 99.11, which is its highest level since June 23 and an indication of a complete reversal in market sentiment. The rally follows a bullish retest of the upper border of a falling wedge formation. This is not surprising as this same pattern has historically been a harbinger of upcoming bullish trends. The index tracks the US Dollar’s value relative to a weighted basket of six other major currencies. It is now headed for its first monthly increase since February, having rocketed more than 2.0% in just month of July.
Much of the recent dynamism in the US economy helps explain this rosy trend. In June, the US goods trade deficit narrowed to $86.0 billion. This was a notable drop from $96.4 billion in May and an encouraging sign that trade conditions may be beginning to improve. A contracting trade deficit puts upward pressure on the value of the US Dollar. It indicates that net exports are increasing, or that the trade balance is improving.
That drop is partially due to the fact that the housing market is stabilizing. In May, the US Housing Price Index dropped by 0.2%, right on the analysts’ predictions. This minor drop does little to put a damper on widespread market optimism, especially with consumer sentiment taking a turn for the better. The Conference Board’s Consumer Confidence Index should rise to a two-month high of 96.0. This is up from 93.0 in June.
That positive sentiment about consumers continues to be fueled by the framework for a US-EU trade agreement unveiled just last week. That deal, announced on Sunday, has been a powerful force behind the US Dollar’s resurgent rally. As part of this deal, the US is going to impose a baseline 15% tariff on almost all EU imports. That’s a big deal—that rate is much less than the original threatened 30%. Whatever the reason, this new development is set to further amplify trade ties between the two economic powerhouses and further cement the dollar’s hegemonic position.
The bullish momentum for the Dollar Index persists as it follows through on the heels of its best daily performance since May. In fact, the index fell to its lowest level in more than three years on July 1, sinking to 96.38. Since then, it has begun a consistent rebound, attracting all eyes from investors and entrepreneurs alike. Analysts will be keenly anticipating the DXY’s next resistance area. It sits on top of 99.42, the high on June 23, and then at 99.97, where the 100-day Exponential Moving Average (EMA) currently resides.
Interest rates are another key element that will determine the dollar’s future course. As of today, the yield on 30-year Treasury bonds is 4.96%. 10-year yield at 4.41% while the 2-year yield is nearly at 4%. These yields are a direct function of investor sentiment about the trajectory of economic growth and inflation, which ultimately impact global demand for dollar-denominated assets.
With the markets now eyeing more economic indicators – leading off with employment figures tomorrow and CPI on Friday – traders will certainly be on red alert. The trade and consumer sentiment indicators might be positive, which would prolong any dollar strength in the coming weeks.