The US dollar index slumps amid a rise in coronavirus cases

Marius Paun | London, UK | Senior dealer | Thursday, 30th July 2020

 

The US dollar has been on a downward slope lately as the American authorities face an ongoing struggle to contain a spike in coronavirus. Day by day hopes for a speedy V-shaped economic recovery is crushed by the high infection numbers. The pandemic has intensified since June with 65,000 new cases detected each day. The easiest way to measure the value of the greenback is the US dollar index. It is a measure of the US dollar against a basket of its major trading partners’ associated currencies the EU, Japan, the UK, Canada, Sweden and Switzerland.

Whatever the context, the dollar’s fate remains closely tied to the interest rate and inflation. On Wednesday we had the FOMC meeting and the Fed left its benchmark interest rate unchanged with Chair Jerome Powell predicting a long road ahead. He added ‘we’re not even thinking about raising rates’ echoing another statement he made a few months back ‘not even thinking about thinking to hike rates’. Powell sees core inflation dropping to 1% so his immediate challenge is dealing with ‘a disinflationary shock’ provoked by the coronavirus.

It still open for debate as to when, rather than if, all this monetary and fiscal stimulus will spark inflation, but for now the Fed is not worried about rising asset prices any time soon. The Fed promised to use all available tools to support the recovery. Fed Chairman warned the Covid-19 is starting to weigh on the earlier momentum when investors thought that a comeback would possibly be as fast as the initial economic slump.

Interestingly Goldman Sachs warned earlier in the week that a potential Fed shift ‘towards an inflationary bias’, coupled with record US debt going even higher, are behind the dollar’s weakness. Meaning the Fed is saying one thing and thinking the opposite? Some levels of inflation will undoubtedly help to eat into that massive government debt but they would have to be confident enough they can walk a very tight rope. Once the genie is out of the bottle who knows how high it goes.

As widely expected, the US Federal Reserve stuck with its dovish stance sending the dollar to the lowest level since June 2018, now trading just above 93.00 marks.

Another reason behind the dollar weakness, now on track to be one of the worst monthly performances on record, might have been the creeping doubts that the US is capable of driving the world out of economic crisis spurred by the pandemic. It seems that lately, any excuse is good enough to sell the dollar first and ask questions later.

Data on Thursday showed that the U.S. GDP contracted by 32.9% in the second quarter, the steepest pace since the Great Depression, although many economists expected the outcome to be worse, 34.7% decline. At the same time, the weekly jobless claims came in at 1.434 million, in line with predictions. The U.S. dollar also extended its recent drop on Thursday when U.S. President Donald Trump hinted the possibility of delaying the presidential election scheduled for November. A real political crisis is brewing.

 

The chart shows a double top pattern in the past three years. The trend is clearly down with bears firmly in control. The moving averages are pointing downwards and the short-term MA has crossed below the longer-term MA earlier in the year. In addition, the price is below both MA, all bearish signals.

The current price is just above 93.00 with next support seen at 91.89. If sellers manage to break through that, next they will undoubtedly target 2017’s low at 91.00. A level of support everyone is keeping an eye on is 88.11, the multiyear low. If that handle gives way than all bets are off and we could see the downtrend gathering even stronger momentum.

On the upside, bulls will be hoping for a pullback to 94.03 especially when they might consider the price now in oversold territory. Next resistance can be seen at 94.52 and it looks like a solid one. A break above 95.26 would really give bulls enough confidence that a more meaningful recovery has legs.