DXY: US dollar index nosedives as chances of a V-shaped recovery rise

The US dollar index (DXY) dropped by more than 0.50% as investors reacted to upbeat manufacturing and services PMI data from Europe. The index is trading at $96.56, with the dollar falling against all components. The best-performing currency in the index is the Swedish krone, which is up by 0.90%. The euro and Japanese yen are up by more than 0.50%.

Global economy recovering

The US dollar is the most powerful currency in the world because of its role as a reserve currency and the security of the American economy. As a result, investors, companies, and high net-worth individuals tend to shift to the greenback in times of crisis.

The same happened at the peak of the coronavirus pandemic. The high demand for the currency led the US dollar index to reach a multiyear high of 102.82.

In recent days, more countries have been reopening their economies, and the economic environment is improving. As such, most individuals who shifted to USD at the height of the crisis are going to their original currencies.

Data released today reinforced the fact that the economy is recovering. According to Markit and Commonwealth bank, the manufacturing and services PMI numbers in Australia rose to 49.8 and 53.2 in June. That was the best growth in more than four months.

In Europe, the PMIs were positive too. In the United Kingdom, manufacturing PMI improved to 50.1 from the previous 40.7. Similarly, the ever-important services PMI rose from the previous 29.0 to 47.0. The composite PMI rose to 47.6 from the previous 30.0.

In the eurozone, data showed that the manufacturing and services sectors have also jumped. The PMIs rose to 46.9 and 47.3, respectively.

US dollar index falls as US economy improves

The US dollar index also eased because the US economy is also improving. Early this month, data showed that nonfarm payrolls jumped while other data showed that retail sales jumped by almost 18% in May.

Today, numbers from the US provided further evidence that the US economy is doing well. The Redbook index, which measures the same-store sales growth in the US, declined by 6.1% in early June after falling by 8.3% in the previous month.

Another data by Markit showed that the manufacturing PMI increased to 49.6 in June from the previous 39.8. This was the highest it has been since March this year. The important services PMI jumped to 46.7 from the previous 37.5 while the composite PMI rose to 46.8.

In the report, Markit said that most businesses had reported progress in their operations. In the statement, Chris Williamson said:

“The flash PMI data showed the US economic downturn abating markedly in June. The second quarter started with an alarming rate of collapse, but output and jobs are now falling at far more modest rates in both the manufacturing and service sectors.”

In another report by the Census Bureau, new home sales in the US were better than what most analysts were expecting. The sales bounced back by 16.6% after rising by just 0.6% in the previous month. In total, more than 676k new homes were sold in May. The data came a day after the disappointing existing home sales in the United States.

All these numbers increase the likelihood of a V-shaped recovery. In an interview yesterday, Steve Schwarzman, the CEO of Blackstone said:

“You’ll see a big V in terms of the economy going up for the next few months because it’s been closed.”

US dollar index (DXY) technical outlook

The US dollar index declined to an intraday low of 96.47. As I wrote yesterday, the index was previously forming a bearish flag pattern, which explains the technical reason why it has fallen today. The index is still below the 50-day and 100-day exponential moving averages and slightly above the 78.6% Fibonacci retracement level. The decline means that the DXY will continue falling as bears target the previous low at 95.75.