Dec 17 2018

USD Index – weaker in 2019?

2018 was the year of the US dollar. Even though, the year started with a dollar’s collapse of 4% in the first month – it was dollar gains consistently throughout the remaining part of the year. The European majors (Euro and Pound) plunged 10%-12% while the Japanese Yen declined 7%. Continuous interest rate hikes by the US Fed (and no such signs of economic recovery in other parts of the developed world) ensured that dollar was consistently bought. What next?

Let’s check out the technical chart to visualize what’s in store for 2019:

First look at 2018 indicates that dollar gains were quite steep from April to mid August. Since then, dollar gains were gradual. Some of the momentum indicators are gradually turning overbought and there is a visible divergence on the MACD. Moreover, 97.86 is the 61.8% retracement of the dollar decline from 103.81 (Jan-2017) to 88.25 (Feb-2018).

With more and more US Fed Governors turning neutral on the interest rates, courtesy Donald Duck (oops sorry Trump), it is getting increasingly difficult to envisage a strong dollar. The 5 year US bond yield has fallen below the 2 year bond yield (for the first time since June 2007). Such a phenomena is called ‘inversion of the yield curve’ and is usually considered to be a precursor of an economic recession. Recall how such an inversion occurred in early 2006 that forecasted the sub-prime crisis.

My sense is that the dollar index will face resistance around the 97.5 – 98.5 range. Not expecting a steep decline towards sub 90s, but certainly a fall towards 92.5 – 93.5. If the dollar index soars above 98.60, the above assessment will be rescinded and will tend to indicate that something else is conspiring.