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

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Aug 18, 2020
  • The US dollar index (DXY) is under pressure today even after strong housing starts and building permits data.
  • Building permits increased by 18.8% in July while housing starts expanded by 22.6%.
  • Analysts cite the stimulus talks, open-ended QE, covid-19 cases, and upcoming elections for USD weakness.

The US dollar index (DXY) is under pressure today even after the Census Bureau released strong housing numbers. It is trading at $92.32, which is the lowest it has been since March 2018.

US dollar index
US dollar index has been under pressure

US housing sector booms

In recent months, economic data from the United States has been relatively strong. Early this month, data from the Bureau of Labour Statistics (BLS) showed that the economy created more than 1.8 million jobs in July. That was in addition to the 7.3 million jobs that were created in May and June. Other numbers showed that the manufacturing and services sectors and retail sales boomed in July.

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Today, data from the Census Bureau and the Housing and Urban Development department showed that building permits increased by 18.8% to 1.49 million in July. That was better than the 1.32 million that analysts were expecting. Single-family authorisation increased by 8.2% to 940,000.

Another data showed that privately-owned housing starts increased by 22.6% to 1.496 million. That was better than the 1.24 million that analysts polled by Reuters were expecting. Further, there was more than 1.28 million house completions in July, a 3.6% increase from the previous month.

So, why is the US dollar under pressure?

The US dollar index has fallen by more than 4.5% in the past three months and by more than 3.8% in the past 30 days alone. In contrast, the British pound index and euro index have gained by more than 3% in the past three months and by more than 4% in the past 30 days.

Analysts cite four reasons for the US dollar weakness. First, the number of coronavirus cases in the US has been rising. Yesterday, the health department confirmed more than 34,000 new infections. Although that was lower than average, it remains significantly higher than other countries. As such, analysts see the US being left behind by its peers.

Second, policies by the Federal Reserve have made dollars abundant in the market. As the supply increases, so does the value of the currency decreases. As you can see below, the balance sheet of the Federal Reserve has increased to more than $7 trillion. Some analysts expect that it will reach $10 trillion in the next few months.

Fed balance sheet
Fed balance sheet has been expanding

Third, the US dollar index has weakened because of the ongoing divisions in Washington. In the past few months, Democrats and Republicans have failed to reach a stimulus agreement. This is exposing the economy to significant risks as the enhanced jobless benefits run out. In contrast, the European Union has passed a landmark spending package worth more than €750 billion. Finally, some analysts have cited the upcoming election as a risk to the US.

US dollar index technical outlook

US dollar index
US dollar index technical chart

The weekly chart below shows that the US dollar index has been in the red for the past nine consecutive weeks. The price has moved below the 50-day and 200-day exponential moving averages. Meanwhile, the RSI has moved to the lowest level since February 2018, which is a sign that it is getting oversold. Still, it seems like bears are currently in control, which means that the price is likely to continue falling to $90.

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