You are not logged in.

#1 03-05-2021 10:21:14

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3069

USD: is the dollar index ready to rebound?

USD: is the dollar index ready to rebound?

The DXY continues to hit new lows with no reversal in sight. Yet bears are being warned by the growing gap between US and G9 economic growth forecasts.

The dollar's decline has been the topic of last month, with EUR/USD rebounding from its low of 1.17 on the very first day of April. From then on, neither the ECB nor the Fed could spoil the party.

Data from the US continues to point to an accelerating economic recovery, as evidenced by Thursday's first quarter GDP. The economy grew by 6.3%, which is in line with expectations and could bring the economy into the pre-pandemic growth trend over the summer.

But why would stronger economic growth weigh on the strength of a currency? Wouldn't it be the other way around: a stronger economy reflected in a stronger currency?

A chart to scare the dollar bears

This chart is not for dollar bears. It shows the performance of the dollar index (DXY) relative to US economic growth over the last decade. The light blue line represents the US lead in economic growth over its G9 counterparts. Since the DXY tends to track growth forecasts closely, traders should look for reversal patterns in the EUR/USD.

So what is the DXY, and why should investors care? The index is formed primarily by the EUR/USD pair (which accounts for more than 56% of the index weight), while the remainder belongs to the Japanese yen (14.0%), the British pound (12.1%) and other lower weighted currencies. It is therefore impossible to have a falling EUR/USD and a rising DXY, or vice versa.

One could say that this time it is different. The Fed is still printing money at $120 billion a month, so the dollar can only weaken as long as the asset purchases continue. But the Fed also eased policy in the aftermath of the great financial crisis of 2008-2009, and when the economy recovered - faster than its peers - the DXY followed suit religiously.

Why should it be any different this time?

"Anything worth having is worth going for - all the way." - J.R. Ewing



Board footer