I asked if the dollar index would hold the 100 level in an early October 2024 Barchart article. I highlighted the sideways trend in the dollar index with a bearish bias, concluding:
In early October 2024, the dollar index is in a primarily bearish trend, threatening to eclipse critical technical support, which could develop into a long-term bearish trend.
The continuous dollar index futures contract was at the 100.61 level on September 30 and fell to a low of around 100. Two months later, the dollar index is moved above the top end of the trading range at the late 2023 107.05 high. While the index threatened to break a level that could have created a long-term bearish trend in late September, it did precisely the opposite, moving over the top end of the trading range as the end of 2024 approaches.
The dollar index turned
bullish and broke above the critical technical resistance
The dollar index recovered after a challenge of the 100 level in late September 2024.
As the monthly chart highlights, the dollar index rallied in October, reaching a 104.64 high. The midpoint of the 99.58 July 2023 low support and 107.35 October 2023 technical resistance high since December 2022 is 103.465. The index rallied over the midpoint in October 2024 as the currency market awaited the U.S. election. The dollar index took off on the upside after the election.
The U.S. election ignited a bullish move in the dollar index
On November 5, 2024, the U.S. elected former President Donald Trump the 47th President by a convincing margin. The incoming President’s win came with majorities in the Senate and the House of Representatives. The election results lit a bullish fuse under the dollar index, sending it above the 107.350 technical resistance level.
The daily chart shows the dollar index futures contract settled at 103.42 on Election Day, November 5. The index rose to a 108.07 high on November 22 as it broke through the upside resistance level, which re-established a bullish path of least resistance for the dollar index.
Geopolitical events could determine if the index continues higher
While wars in Ukraine and the Middle East broke out during the outgoing Biden administration, the geopolitical issues dominating during President Trump’s first term from 2017 through 2021 were trade-related.
President Trump has pledged to end wars in Ukraine and the Middle East and to use tariffs as economic weapons to even the U.S.’s balance of trade. Time will tell if the wars end and if the threat of tariffs is a negotiating tool for the incoming administration.
Meanwhile, the dollar index challenged the crucial technical resistance level before inauguration day in January. The Trump administration’s success on the geopolitical landscape propelled the dollar index into a bullish trend, ending the consolidation period of the past years.
Interest rate trends are crucial- Mixed signals for the dollar index
The price action in the U.S. interest rate markets has been fascinating over the past months. In September, the Fed began cutting the short-term Fed Funds Rate. At the end of November, the central bank has already reduced the short-term rate by 75 basis points to a midpoint of 4.625%. The Fed has told markets to expect another 25 basis point reduction in 2024, and the FOMC’s dot plot forecasts 100 basis points of cuts in 2025, which would lower the Fed Funds Rate to 3.375% by the end of next year.
The central bank determines short-term interest rates, while market forces determine longer-term rates. With the U.S. debt at the $36 trillion level, and inflation remaining above the Fed’s 2% target, longer-term rates have moved higher since the Fed began reducing the Fed Fund Rate.
The U.S. 30-year Treasury Bond futures chart highlights the decline from 127-22 in September 2024 to the most recent 115-10 low in November 2024. Falling bond prices indicate rising long-term interest rates. However, it recovered to over the 119 level on November 29.
Interest rate differentials are a critical factor for the path of least resistance of one currency versus another. The dollar index faces lower short-term rates, which are bearish, versus steady to higher long-term rates, which are bullish. Since longer-term rates have a more significant impact on economic fundamentals, the action in the U.S. government bond market has been bullish for the dollar index.
Can the new administration defy a historical trend that says the U.S. dollar’s days of dominance are limited?
While the dollar index measures the U.S. currency against a basket of the other reserve currencies, including the euro, pound, yen, Canadian dollar, Swedish krona, and Swiss franc, the dollar remains the world’s reserve currency.
Historical data and trends tell us that the U.S. dollar’s days as the dominant foreign currency could be ending. The average term for a leading world currency has been around a century since 1450:
- 1450-1530- Portugal’s currency was the world’s reserve foreign exchange instrument.
- 1530-1640- Spain led the world with the dominant currency.
- 1640–1720- The Netherland’s currency was the top instrument.
- 1720-1815- France held the position of the dominant financial power.
- 1815-1920- Great Britain’s pound was the world’s reserve currency.
- 1920-? — The U.S. dollar has been the leading currency.
While history does not guarantee the dollar’s demise, it provides a compelling case for change in the coming years in the current environment. The incoming Trump administration’s policies will determine whether the dollar’s global role continues or if a BRICS currency or the Chinese yuan will replace the greenback as the next reserve foreign exchange instrument.
Now that the dollar index broke above the 107.350 resistance level, the next upside technical target is the September 2022 114.78 high. From a long-term perspective, the dollar index has been in a bullish trend.
The long-term quarterly chart shows the bull trend since the 2008 70.690 low. Meanwhile, the dollar index has made lower highs since the 1985 164.72 peak. The bullish trend since 2008 and the bearish trend since 1985 are more reasons for confusion about the index’s path of least resistance. The move above 107.35 could be a clue about the dollar’s status against the other reserve currencies and its dominant position worldwide.
