The US Dollar Index has Traveled A Thousand Miles to Get to This Point

• The first day of September found the US dollar index knocking on the door of 110.00, its highest level since June 2002. 
• Strong global investment interest in the US dollar continues to push it higher, due in part to the stability of the US Federal Reserve approach to interest rate hikes. 
• From a technical point of view, the US dollar index is showing no sign of a long-term reversal pattern, and as this trend has shown us it's best to not jump the gun when looking for a sell signal. 

The number one movie at the time was Scooby Doo, while the top song was A Thousand Miles by Vanessa Carlton. On the literary front, the bestselling book was The Lovely Bones by Alice Sebold, all while George W. Bush was in the White House. How far back have we gone in the time machine this morning? We have returned to June 2002, the last time the US dollar index ($DXY) was knocking on the door of 110.00, though back then it was falling through a door in the while this time the door looks to take the greenback higher. 

A look at the long-term monthly chart for the $DXY shows an impressive rally. If we squint our eyes just right and trade the index back to late 2020 early and early 2021, we see the faint form of a double bottom. Th $DXY posted a low of 89.20 during January 2021 before rallying to a high of 93.43 that March, a move that led immediately to a break back to 89.53 during May. After that, though, it has basically been nothing but straight up. The key point occurred during August 2021, almost without notice, as the $DXY hit a new 4-month high beyond the previous mark of 93.33, confirming the dollar had moved into a major (long-term) uptrend. This move was originally signaled by the bullish crossover by monthly stochastics below the oversold level of 20% at the end of February 2021. That’s the thing about long-term monthly charts, and their place in the Goldilocks Principle[i], one may have to wait six months for a market to confirm a signaled change. This can work in markets viewed as long-term investments, like currencies, but I wouldn’t recommend it in markets like natural gas, lean hogs, or wheat, to name a few. 

As mentioned, since August 2021 the $DXY has gone vertical, only occasionally giving a sign of a possible top forming. Note the index posted what looked to be a clear bearish spike reversal during May 2022 (arrow) as it posted a new high for the move of 105.00 before closing lower for the month. This coincided with monthly stochastics sitting well above the overbought level of 80%, with the most recent bearish crossover seen at the end of November 2021 (six months, again). But as the calendar page turned from May to June, there was no follow-through selling. In fact, the most the $DXY dipped below the May close of 101.75 during June was down to 101.68 on its way to a new high of 105.79. Did long-term shorts get stopped out? Most likely, as the index passed through the May. 

During July the dollar seemed to be doing its Sisyphus impersonation as it pushed itself up to a high of 109.29 before rolling back down to close the month at 105.90. Again, there were thoughts of a possible top, this time based on the Horseshoe Proximity[ii]. I know I talked about it at the time, particularly with monthly stochastics continuing to hold above 80%. But as August proved, the. Horseshoe Proximity can also get us into trouble as the $DXY reached 109.48, only to be surpassed with a new high of 109.98 on September 1. 

With central banks across the globe raising interest rates in a futile attempt to tame inflation, the US dollar still looks to be the currency of choice for investors. Why? Possibly because the US still has the most stable economy, and some would argue the most stable approach to interest rate hikes. Look at it this way: The US Federal Reserve, led by Chairman Powell, does everything it can to keep its process transparent, running well ahead of rate hikes with talk of what is likely to happen. The US Fed’s job is not to shock the markets, currencies or otherwise, but to set and implement economic policy. Do I think they were late to the rate hike game? But since moves started to be made the Fed has been more consistent. 

Speaking of consistency, at the end of June 2002 the Kansas City Royals (my Major League Baseball team of choice) were 17 games below 0.500. This past June the Royals were 20 games below 0.500. Some things we don’t need a time machine for. 

[i] The Goldilocks Principle: Daily charts are too hot, monthly charts are too cold, but weekly charts are just right. 

[ii] The Horseshoe Proximity reminds us that there is no such thing as perfectly clear patterns in analysis, so sometimes close is close enough. 

• Dollar Rallies to a 20-Year High as T-Note Yields Climb
• Growth Concerns and Rising Bond Yields Hammer Stocks
• Dollar Slightly Lower on Weak U.S. Labor News
• The Erosion of the Euro Currency