The US dollar (DXY) has traded in a range of between 100 and 106 for most of the past two years (FIG 1). In recent months, though, it’s broken down below its key support level (at 100). Initially that happened in late April. It then made a new multi-year low last week (and today), even as the Israel-Iran conflict has escalated (FIG 1). In other words, despite a significant geopolitical shock, the dollar has continued to trend down. That has surprised traders and investors who would normally expect the opposite (i.e. flight to the dollar, as a key safe haven asset).
In the near term, the case for a bounce in the dollar is arguably brewing (i.e. a counter trend relief rally). Indeed, since the ‘blow off top’ in the dollar in mid-January, the DXY is down ~11%. With that, it’s technically oversold, with some of our medium term models generating clear BUY signals. Elsewhere, measured sentiment readings are back at bearish levels (and generating a contrarian BUY signal for the DXY).
A weak dollar, though, in the face of heightened uncertainty and rising geopolitical risk, is poor (bearish) price action. It’s also consistent with several (dollar negative) macro themes, which are likely to persist in coming months, and probably beyond. They include, most notably, the loss of ‘American Exceptionalism’, and growing evidence that the US economy is undergoing a ‘mid-cycle’ soft patch (see recent Longview research for detail). Of note, in that respect, and despite recent weakness, net speculative positioning in the US dollar remains LONG. That highlights the fuel for further weakness (FIG 2). Currency trends occasionally persist for longer than many expect. This is potentially one of those times.
FIG 1: DXY futures candlestick with 50 & 200 day moving averages
FIG 2: Aggregated USD value of positioning vs. Broad US dollar index
