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The Dollar May Be About To Push A Lot Higher

By Michael KramerForexSep 04, 2020 06:47AM ET
www.investing.com/analysis/the-dollar-may-be-about-to-make-a-big-push-higher-200536400
The Dollar May Be About To Push A Lot Higher
By Michael Kramer   |  Sep 04, 2020 06:47AM ET
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This article was written exclusively for Investing.com

The Dollar Index has declined sharply in recent weeks, as US government spending soars and rates on the 10-year US Treasury sink. It has resulted in the euro surging to as high as 1.20 to the dollar. Since peaking on March 19, the Dollar Index has slumped by nearly 10%. However, those significant declines may be over.

The big shot across the bow may have come from the ECB's chief economist Philip Lane, who noted that the exchange rate of the euro matters to the health of the eurozone. When the ECB instituted a negative interest rate policy in 2015 and 2016 under Mario Draghi, it resulted in the single currency weakening versus the dollar to nearly 1.05, rallying briefly to around 1.20 to the dollar in 2018, and then sinking again.

However, it was those aggressive monetary policies that suppressed and kept the euro low versus the dollar and close to parity.

EUR/USD Daily 2013-2020
EUR/USD Daily 2013-2020

More Aggressive Monetary Policy

Now, Draghi is gone, and the euro has surged to around 1.20 to the dollar as the Federal Reserve has gotten very aggressive with monetary policy to fight off deflationary forces from the coronavirus-induced recession. If the ECB is intent on reducing the exchange rate, it means that more aggressive monetary policy is likely to come, and that would mean the dollar is likely to strengthen as a result. A weaker euro helps to boost inflation and growth across the eurozone, while also helping to make goods more competitive abroad, assisting the eurozone's export economies.

A Bottoming Pattern

If a more aggressive monetary policy does come from the ECB, then it is likely to result in a longer-term move higher in the US dollar. The technical chart even suggests that a reversal may be in the works.

The DXY has seen its relative strength index fall well below oversold levels at 30, all the way down to 18. Now that RSI is starting to rise and has been steadily trending higher.

The rising RSI, while the value of the index has been trending lower in a trading channel, creates a bullish divergence and indicates a dollar reversal higher may be on the way. It suggests that momentum in the Dollar Index is shifting from a bearish to bullish trend.

Should the Dollar Index rise above 93.75, it is likely to result in a further push higher to around 96. It could be the start of a longer-term reversal higher.

A longer-term surge in the dollar would create potential issues, especially for risk assets and assets linked to inflation.

DXY Daily
DXY Daily

Inflation Linked Assets Could Struggle

Gold would be one such asset class that could suffer significantly after its 32.7% rally since the March lows. The precious metal’s big advance has come as some investors have sought its safety as a store of value and as a hedge against inflation pressure. With the dollar rising, it would damage the prospect for inflation surging and reduce the need to hold gold as a store of value.

Should the dollar’s bottom be in place, it will likely come at the hands of the central banks, such as the ECB taking on more aggressive monetary policy. Just how far the dollar can rally will largely be dependent on how far that monetary policy is pushed and more importantly how the markets respond to it.

The Dollar May Be About To Push A Lot Higher
 

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The Dollar May Be About To Push A Lot Higher

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Comments (11)
Scott wilson
Scott wilson Sep 07, 2020 4:02AM ET
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i don't think it worth shot??
MK MK
MK MK Sep 04, 2020 2:05PM ET
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Funny to read about dollar safety. Those times past away
Qiniselani Mahlaba
Qiniselani Mahlaba Sep 04, 2020 12:51PM ET
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does that means News Events are coming back with more volatility..
AIM Investor Journal
AIM Investor Journal Sep 04, 2020 12:12PM ET
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This article makes no sense. The Dollar's strength is not linked to gold. Gold pricing is affected by Dollar movements but it is not dictated by this alone. The USD could well outperform the Euro from here but in the context of mass unemployment, rates at near 0 for the foreseeable future and stimulus being pumped into every major economy, inflation is eating away at all fiat currencies.  Store of value like gold, silver, platinum, palladium, rhodium etc are likely to mirror price movements from 2009-2011 when the Eurozone crisis saw the USD rise against the Euro but ultimately remain suppressed against precious metals. Youth unemployment in parts of Europe is sky rocketing towards 50% again but these issues stem from global recessionary causes rather than bank defaults. It remains to be seen whether this recession develops into a wider banking crisis but either way the green shoots of growth are the only thing that will threaten precious metal price appreciation in the short term
Juan Gonzalez
Juan Gonzalez Sep 04, 2020 12:12PM ET
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crypto also reworked the beta
Ben Brown
Ben Brown Sep 04, 2020 12:11PM ET
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Very well written and more confirmation for gold at $1750 before the end of Nov.  getting set!!
Samantha Kullberg
Samantha Kullberg Sep 04, 2020 12:05PM ET
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What rot. All this means is to control inflation FED will not be giving more stimulus forcing people to work, causing covid deaths to rise.. GOLD is the worldwide standard and America and Britain do not have thier ***together. UUP can only defy gravity for so long.
Li JL
Li JL Sep 04, 2020 12:03PM ET
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He is right, FED buying asset, isnt using any dollar  at all .  Economic student will understand what I mean
Shawn Gachassin
Shawn Gachassin Sep 04, 2020 12:02PM ET
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What about Bitcoin?
Chris Poulos
Chris Poulos Sep 04, 2020 11:13AM ET
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yes. the markets will continue to go down significantly for the rest of the year ... dow will hit 15k or lower ... nasdaq 5k ... people will run to the relative safety of the dollar. some of the march lows will be retested or nearly ... aud & nzd will fall back severely .... aud/jpy is at nearly 2 year highs in the middle of a global recession & pandemic!?!? what? yeah thats gonna correct ... as will other out of whack currency pairs.
Andrew carson
Andrew carson Sep 04, 2020 10:35AM ET
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All paper with no backing.
steve fox
steve fox Sep 04, 2020 8:17AM ET
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with the euro and usd both trying to out print each other and gold is suppose to drop? interesting theory
Justin McNaughton
Justin McNaughton Sep 04, 2020 8:17AM ET
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gold denominated in USD, so unfortunately, yes. makes no sense but look at history, gold seems to be a temporary trade, no a representation of total printed money in the world. if it was, gold would be a million an ounce by now.
Justin McNaughton
Justin McNaughton Sep 04, 2020 8:17AM ET
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and this is no theory, it's the name of the game. everyone tries to outprint the other and we all get "rich"
steve fox
steve fox Sep 04, 2020 8:17AM ET
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does a strong usd come with a weak stock market?
Hassan Salloum
Hassan Salloum Sep 04, 2020 8:17AM ET
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But in 1980s and 2009-2011 gold and dolar index were on rise together...
 
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