Is the US Dollar Index Getting Ready to Bounce?

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on Apr 30, 2021
Updated: Dec 19, 2022
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The DXY keeps pushing to new lows with no reversal pattern in sight. Yet, bears are warned by the rising gap between US economic growth expectations and its G9 peers.

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With only one trading day left this month, the US dollar remains offered across the FX dashboard. The decline in the dollar was the theme of the month, with the EUR/USD bouncing from its 1.17 low on the very first day of April. From that moment on, neither the ECB nor the Fed could spoil the party.

Data from the United States continues to point to a faster economic recovery, as demonstrated by the first quarter GDP released yesterday. The economy grew by 6.4%, in line with expectations and with the potential to reach the pre-pandemic growth trend during the summer.

But why would stronger economic growth weigh on a currency’s strength? Shouldn’t it be the other way around: a stronger economy reflected by a stronger currency?

A Chart To Scare Dollar Bears

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This chart is not for dollar bears. It shows how the dollar index (DXY) performed in comparison to US economic growth in the last decade. The light blue line represents the US lead in terms of economic growth versus its G9 peers. Since the DXY tends to follow the growth expectations closely, traders should look for some reversal patterns on the EUR/USD.

So, what is the DXY, and why should investors care? The index is formed mostly by the EUR/USD pair (accounting for more than 57% of the index’s weight) while the rest belongs to the Japanese yen (13.6%), the British pound (11.9%), and other currencies with a lower weight. It is therefore impossible to have a declining EUR/USD and a rising DXY, or vice versa.

One may argue that this time is different. The Fed keeps printing money to the tune of $120 billion a month, so the dollar can only weaken as long as the asset purchasing continues. But the Fed also eased in the aftermath of the 2008-2009 Great Financial Crisis, and when the economy picked up — faster than its peers — the DXY followed religiously.

Why would it be different this time?

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