Will the Dollar Index Hold 100- Does it Matter?

The U.S. dollar index is trading sideways, just above the psychological 100 level. While 100 is not technical support for the metric that measures the U.S. currency against other like-minded foreign exchange instruments, the dollar could be declining on two fronts. 

In an August 22, 2024, Barchart article on commodity prices and de-dollarization, I highlighted the history of reserve currencies, concluding:

As the currency markets evolve into a two-tier system, the U.S. dollar could temporarily share the reserve currency position with China’s yuan. Still, history teaches that there is only room for one currency at the top of the international podium. If the dollar’s demise continues, expect the commodity bull market to continue. 

The December dollar index is just above 100, with technical support on the continuous contract just below. 

A sideways trend with a bearish bias

The U.S. dollar index reflects the U.S. currency’s value against a basket of allied reserve currencies. 

The chart shows the composition of the dollar index. Currencies in the basket are freely convertible reserve currencies. 

The ten-year U.S. dollar index chart highlights the sideways trend, with the index trading between 99.58 and 107.35 since December 2022. While the index has been in a narrow range, the bias remains bearish in early October 2024 at the bottom end of the trading range. The index is close to the psychological 100 level and the critical 99.58 technical support. 

Falling interest rates favor a lower dollar index

On September 18, 2024, the U.S. Fed’s FOMC announced a 50 basis point Fed Funds Rate cut, shifting monetary policy to a more accommodative stance. Inflation and other economic data justified the rate decline from a midpoint of 5.375% to the 4.875% level. The Fed told markets to expect the Fed Funds Rate to decline to 4.375% by the end of 2024. 

Interest rate differentials are a primary factor in the value of the U.S. dollar against the other reserve currencies. Therefore, declining U.S. rates will likely put downward pressure on the U.S. dollar index, increasing the odds of a decline below the 99.58 support level. 

Technical levels to watch

The long-term dollar index chart highlights its critical technical levels. 

The twenty-year chart shows support at 99.58, the July 2023 low, 89.20, the January 2020 low, and 88.25, the February 2018 bottom. Below there, support is at the 2011 72.69 low and the 2008 70.69 low. 

Technical resistance is at the October 2023 107.35 high and the September 2022 114.78 high.

A significant trend could take time

As the long-term trend shows, trends in currency markets and the dollar index can last for years. The bullish trend that took the index from the 2008 70.69 low to the 2022 114.78 high took nearly a decade and a half. 

Meanwhile, the dollar index’s last significant bearish trend took the index from 164.72 in 1985 to the 2008 70.69 low, which took nearly a quarter of a century.

Time will tell if a technical break leads to a long-term bearish trend in the dollar index. 

UUP and UDN are the dollar index ETF products

The most direct route for a risk position in the dollar index is the futures contract and related options on the Intercontinental Exchange (ICE). Futures and options require a special account and often involve margin, creating leverage. The Invesco DB U.S. Dollar Bullish Fund (UUP) and its bearish counterpart UDN reflect changes in the dollar index. UUP moves higher when the index rallies and UDN moves higher when the index declines. 

The last rally in the dollar index took it 5.86% higher from the late 2023 100.62 low to the mid-April 2024 106.52 high. The decline to 100.21 in mid-December took the index 5.92% lower. 

The chart shows that the bullish UUP ETF moved 7.65% higher and 3.49% lower over the same period. 

Over the same period, UDN, the bearish dollar index ETF, moved 8.55% lower and 7.71% higher. UUP and UDN do an excellent job tracking the U.S. dollar index and providing market participants with an alternative to the dollar index futures and futures options contracts. 

At $28.13 per share, UUP had around $318.8 million in assets under management. UUP trades an average of over 627,700 shares daily and charges a 0.77% management fee. At $18.96 per share, UDN had over $63.5 million in assets under management. UDN trades an average of over 95,000 shares daily and charges the same 0.77% management fee. 

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. UUP and UDN are ETF products that will track the dollar index, providing dollar index bulls and bears with an alternative to the futures arena. 

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