DXY: US dollar index ends in the red for the fourth straight week

The US dollar index (DXY) is down by 0.25% as traders reflect on the rising number of coronavirus cases in the US and the ongoing EU recovery fund meeting. The index is down by more than 0.60% this week, and is trading near its March lows.

US recovery in question

The US dollar is weak against most currencies that make the US dollar index. It is down by more than 0.60% against the Swiss franc, 0.40% against the euro, and 0.45% against the Swedish krone.

This weakness is partly because of the rising number of coronavirus cases in the US. Traders believe that these cases, together with the response by the Trump administration, puts the US recovery at risk.

Health officials in the US have reported more than 3.5 million infections and more than 138,000 deaths. Yesterday, the number of infections rose by a record 3.5 million while deaths rose by 924.

As a result, many states have slowed their reopening plans. For example, early this week, California announced a state wide lockdown in a bid to slow infections. Other states like Texas, Arizona, and Florida are said to be considering limiting some movements.

Subsequently, these lockdowns will affect the US economy, which was starting to roar back as evidenced by the strong labour marketand manufacturing sectors.

Indeed, data released today showed that the housing sector has started to recover. According to the Census Bureau, building permits rose to 1.24 million in June from the previous 1.21 million. In the same month, housing starts rose by 17.3% to 1.18 million. Analysts polled by Reuters were expecting the starts to jump to 1.169. The report said:

“Privately-owned housing completions in June were at a seasonally adjusted annual rate of 1,225,000. This is 4.3 percent above the revised May estimate of 1,174,000 and is 5.1 percent  above the June 2019 rate of 1,166,000.”

Why the US dollar is falling

Therefore, the US dollar index could be falling because investors hope that the Fed will be called upon to support the economy. This support could include more interest rate cuts, more quantitative easing, and unconventional strategies like yield curve control. In a statement yesterday, New York Fed’s chair, John Williams said:

“We have a long ways to go to get back to full strength. My hope is, though, that we’ll continue to see positive signs of a gradual recovery over the second half of this year, into next year. But right now this is a critical inflection point.”

As the US continues to struggle, other countries have made significant strides in dealing with the crisis. For example, according to the European Centre for Disease Prevention and Control (ECDC), the EU, EEA, and the UK have more than 1.6 million confirmed cases. And the numbers are falling.  In a note, analysts at ING said:

“With the EU Summit’s outcome likely setting the tone towards the start of the week and given our fairly optimistic view on some progress on the Recovery fund, we could see the USD still offered versus currencies sensitive to EU sentiment, although weak sentiment in Chinese equities may limit Asia FX gains.”

US dollar index technical outlook

The US dollar index is trading at 96.00, which is a few pips above this week’s low of 95.80. On the daily chart, the price is below the 50-day and 100-day exponential moving averages. It is also slightly below the 78.2% Fibonacci retracement level. Further, the RSI has moved from a high of 47 to the current 37. Therefore, since it is not yet at oversold, it means that the index is likely to continue falling. If it does, the next target will be $95.50.