DXY: Greenback’s Pullback May Be Short-Lived

Like it or not, the U.S. dollar is the world’s reserve currency and therefore, the axis upon which the global financial system turns. As traders try to adjust to the rapidly-changing global health and economic outlook as COVID-19 spreads, the U.S. dollar has served as both a source of funds and the most demanded asset on the planet in just the last three weeks alone.

As we documented earlier this month, the US dollar index initially saw a quick 5% dump through early March as coronavirus broke out of China, driven by traders unwinding carry trades based around the relatively “high-yielding” US dollar. The world’s reserve currency then turned on a dime as the pandemic reached crisis levels at the start of last week, and as experienced traders will know, there’s no asset in more demand than the greenback when a financial crisis hits.

As the chart below shows, the U.S. dollar index exploded more than 8% higher trough-to-peak in less than two weeks to approach 103.50, which marks the highest level the buck has traded at in the last 17 years!

USD Index Daily Chart USD Index Daily Chart

As of writing today, the greenback is actually the weakest major currency. Whether that’s due to the aggressive actions by governments across the globe, the Federal Reserve’s rapid easing and crisis-era responses to ease financial conditions, or mere profit-taking ahead of the weekend, the medium-term technical outlook for the U.S. dollar remains bullish following the big breakout above the 100.00 level earlier this week.

For FX traders, there may be a short-term opportunity to bet against the buck for a short-term retracement toward that key 100.00 level (equivalent to the 1.08-1.09 range in EUR/USD and around 1.20 in GBP/USD). Longer-term though, traders who missed the initial breakout in the dollar index may view a pullback toward 100.00 as an opportunity to join the recent bullish swing at a better price for a potential move up to retest key resistance at 103.50.