DXY: US dollar index falls as Deutsche Bank warns on greenback demand

The U.S. dollar index (DXY) pair declined by more than 0.50% as investors started to price-in a V-shaped U.S. recovery. The index is also reacting to signs of progress between Berlin and the ECB and weaker-than-expected U.S. existing home sales data. It is trading at 97.11, which is the lowest it has been since Thursday last week.

Signs of V-shaped recovery

The U.S. dollar index measures the strength of the greenback against major currencies. The euro rose by 0.72% while the sterling rose by 0.70%. Similarly, the Swedish krone, Swiss franc, and Canadian dollar rose by 1.05%, 0.50%, and 0.43% respectively.

Part of the reason for this is that demand for the dollar has waned in recent days as most countries emerge from the virus. In the United States, economic numbers have been relatively encouraging. For example, the unemployment rate dropped while retail sales jumped by more than 17% in May. Other numbers, including industrial production, consumer confidence, and manufacturing production, also showed signs of improvement.

Meanwhile, auto sales numbers have started to recover. In a recent report, analysts at JP Morgan raised their 2020 light vehicle seasonally adjusted annual sales (SAAR) to 14.5 million from the previous 13.5 million. In the statement, the bank said:

“We didn’t call it, nor did we expect it, but numerous data points all suggest the U.S. auto industry is in the midst of a once-fabled but clearly no longer mythical ‘V-shaped recovery.”

Other analysts, such as those from Morgan Stanley, Payne Capital Management, and Banque Lombard Odier have all predicted a V-shaped recovery.

The U.S. dollar index also declined after Deutsche Bank warned about the safety of the USD. In a statement, the analysts warned that the “emergency dollar demand seems to be waning.”

Still, the rising coronavirus cases could help provide support for the greenback. Over the weekend, cases in the United States, Germany, and Brazil jumped.

Berlin and ECB make progress

The euro has the biggest weighting in the U.S. dollar index (DXY). Therefore, a sharp movement of the euro tends to have an impact on how the index performs.

Today, the euro shot up after Germany and ECB sought to calm the market about bond purchases. In a statement, the German finance minister said that the country was seeking to resolve the issue “without drama.”

He was speaking about a rule made by a court based in Karlsruhe a month ago. In the ruling, the court ordered the German government to ensure that the ECB provided a “proportionality assessment” of its ECB program. The court also warned that it would block the ECB from more bunds purchases if it failed to comply.

The risk of this ruling is that it would have robbed the ECB of its most useful monetary policy tools. Most of the bond purchases the ECB does are usually from Germany.

Meanwhile, the U.S. dollar index also reacted to weak existing home sales numbers. Data from the National Association of Realtors showed that existing home sales declined by 9.7% in June. This was worse than the 3% decline that analysts were looking at. It was better than the previous decline of 18.8%.

U.S. dollar index technical outlook

The four-hour chart shows that the U.S. dollar index has been on an upward trend since June 10, when it was trading at 97.75. During this climb, it has formed an equidistance channel, which is shown in blue. The price is now at the lower side of this channel. It is also below the 50-day and 100-day exponential moving averages. Therefore, a break below the current support will see the index attempt to retest the 23.6% Fibonacci retracement level at 96.86.