DXY: Here’s why the US dollar index is in a steep free fall

The US dollar index (DXY) declined for the seventh straight day as the world economy continued to show signs of life. The index is trading at $97.32, which is the lowest it has been since March 12.

Why the US dollar index is in a free fall

The US dollar is the world reserve currency. As such, it tends to rise when market risks increase because investors and business rush to its safety.

The same happened in March, when the novel coronavirus illness was declared an international pandemic. As seen above, the US dollar index rallied to almost $103, its highest level since January 2017.

Now, more countries are reopening their economies and the economic condition is improving. This is evidenced by the latest economic data. For example, the UKandeurozone services PMIhave started to show some improvement.

As a result, more investors and companies are shifting their finances back to local currencies. This, in turn, is leading to lower demand for the US dollar. As shown in the chart below, while the DXY has declined, other currencies like the Australian dollar, New Zealand dollar, and Norwegian krone have been surging.

US business activity start to rebound

The US dollar index also reacted to better-than-expected economic data from the US. The first major economic data today was the employment numbers from ADP. The numbers showed that private payrolls dropped by more than 2.76 million in May. While this was a weak data, it was better by far than the previous decline of more than 20 million people.

According to ADP, large businesses were the most affected, shedding more than 1.6 million people. They were followed by midsized companies that shed more than 722k people and small companies that lost more than 435k people.

The service-providing sector was the worst affected, losing more than 1.9 million. Most of these jobs were in the transport, trade, and utilities subsectors. They were followed by other services and professional businesses.

These numbers by ADP came approximately two days before the Bureau of Labour Statistics is set to release the official numbers. Analysts polled by Bloomberg expect the unemployment rate to soar to almost 20 million people. They also expect the nonfarm payrolls to drop by 8 million.

The US dollar index also reacted to the positive services PMI data. According to Institute of Supply Management (ISM), the non-manufacturing PMI rose to 45.4 in May from the previous 41.8. The key indexes like new orders, employment, and business activity made some significant improvement. Still, a PMI reading of below 50 is usually a sign that the industry is struggling.

Data from Markit showed that the services PMI rose from 26.7 to 37.5. In a statement, Chris Williamson said:

“The PMI numbers indicate that the US economy remained in a steep downturn in May. Encouragingly, the rate of contraction has eased considerably since the height of the lockdown in April as some firms get back to work and economic activity starts to resume.”

US dollar index (DXY) technical outlook

On the daily chart, the US dollar index has declined to the lowest level since March. It is trading below the 50-day and 100-day exponential moving averages while the RSI has moved to the oversold level. Also, the index is below the 61.8% Fibonacci retracement level. Therefore, the index may continue to decline as the bears attempt to move below the psychological level of 67.00.