After a period of strong gains against major global currencies, the US dollar has taken a breather, but we should expect further strengthening in the long term.
The US Dollar Index, created by the US Federal Reserve, is a weighted calculation of six currencies against the dollar. It is the most widely followed measure of the dollar against global currencies. The components are the euro, with a 57.6 per cent weighting; the Japanese yen, with 13.6 per cent; the British pound, with 11.9 per cent; as well as the Canadian dollar, Swedish kroner and Swiss franc.
The index experienced a strong breakout above the 85 to 86 range in November, and this column drew attention then to the possibility of a strong dollar in the following months. Since then the dollar has gained strength against most global currencies, with the US Dollar Index reaching levels around 100 in March.
This move chimed with rising expectations that the Fed would soon start to raise interest rates – although analysts believe that the timing could be delayed until next year – while the European Central Bank moved in the opposite monetary position by beginning a quantitative easing programme.
Despite these dynamics still being in play, the dollar has experienced a little pull back over the past couple of months, which is to be expected after such strong increases. The latest decline is likely to end as the dollar index finds support between 90 and 92.50.
However, we should expect this weakness to be relatively short-lived, with the chart pointing to long-term dollar strength. This is because the bigger picture shows that the breakout in November was very significant – the dollar index breached a boundary of a decade-long pattern of sideways consolidation.
When this happens, we should expect the beginning of a new multiyear trend. If the dollar rebounds in the coming days and weeks, as expected, we should watch for the index to again move towards 100.
Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD.
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