The relentless US Dollar Index (DXY) sell-off experienced earlier this year has faded, and many hedge funds are betting in its comeback in the fourth quarter. The DXY Index was trading at $98.7 on Thursday morning, up from the year-to-date low of $96.24.
Why the US Dollar Index has plunged this year
The US Dollar Index has been in a strong downward trend this year. After peaking at $110 earlier this year, the index plunged to a low of $96.22.
This plunge happened after Donald Trump was inaugurated as the US president earlier this year. In interviews, he mentioned that the strong dollar was affecting the economy and suggested that he favored it to be weak, a move that would benefit exporters.
Some of Trump’s policies have led to a weaker US Dollar Index. For example, he has considered firing Jerome Powell from his position as the Federal Reserve chairman. He also recently fired Lisa Cook, a process that is currently in the court system.
The lack of Fed independence would have a negative impact on the US Dollar. A good example of this is the Turkish lira, which has been in a relentless sell-off for decades because of Erdogan’s power in firing and appointing the head of the CBRT.
The US Dollar Index also plunged as central banks moved to other assets. A good example of this is gold, which has been in a relentless bull run such that it has crossed the important resistance level at $4,000 this week.
The DXY index also plunged after Trump implemented substantial tariffs against other countries. It has dropped by nearly 6% after Donald Trump’s Liberation Day tariffs in April this year.
Most recently, it dropped after the Federal Reserve slashed interest rates in the last meeting. It cut rates by 0.25% in the last meeting.
Why the DXY Index may rebound soon
The DXY Index may rebound soon for two main reasons. First, the options market shows that hedge funds are favoring the dollar as they bet that the ongoing rebound against most peers will extend into the end of the year.
For example, the EUR/USD put options expiring by the end of the year, which rise in value when the currency falls, have had three times more volumes than calls in the past few days. The same view has happened on other currencies like the sterling, the New Zealand dollar, and the Australian dollar. In a recent note, an analyst said:
“Most of the dollar call buying has been in the G-10 majors and the jumps in front-end risk reversals in these currencies are a good indicator of the turn in demand.”
The daily timeframe chart shows that the US Dollar Index has formed a double-bottom pattern at $96.41 and has rebounded to the current $98.72. A double-bottom is a highly common bullish reversal pattern in technical analysis.
The index has also jumped above the 50-day Exponential Moving Average (EMA), while the Relative Strength Index (RSI) has pointed upwards.
Therefore, the most likely scenario is where the index continues rising a bulls target the key resistance at $100.16, the highest point in August. This price coincides with the neckline of the double-bottom pattern and the lowest point in September.
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