The US dollar is facing a critical breakdown against major global currencies as inflation cools, with experts predicting a sustained period of weakness for the greenback. The US Dollar Index, which measures the value of the dollar against a basket of major currencies, recently fell below its key support level of 100, indicating a potential reversal of the currency’s gains over the past two years.
Fairlead Strategies, a renowned financial advisory firm, highlighted the significance of this breakdown, citing a loss of momentum across various timeframes, including a new weekly MACD ‘sell’ signal. Technical analyst Katie Stockton, founder of Fairlead Strategies, emphasized the likelihood of a decisive breakdown, especially if the index closes below 100 for a second consecutive week.
The decline in the US Dollar Index is seen as a continuation of the long-term bearish trend that began when the weekly cloud model was breached in March. Will Tamplin, senior analyst at Fairlead Strategies, indicated that the index may find support near the 99 level. However, the overall outlook remains bearish.
The weakening US dollar has coincided with the strength of other currencies, such as the euro, yen, and Canadian dollar. The euro, in particular, has risen approximately 5% against the dollar year-to-date, and analysts expect this upward momentum to persist.
The recent depreciation of the dollar is largely attributed to a slowdown in US consumer price inflation. The US Federal Reserve aims to bring inflation down to its 2% target and has gradually raised interest rates over the past 16 months. However, the latest data shows that headline annual consumer price inflation fell to 3%, down from 4% in May, signaling progress toward the Fed’s goal.
Mark Haefele, chief investment officer at UBS Global Wealth Management, expressed confidence in the prolonged weakness of the dollar, recommending investors with yen, euro, pound, or Swiss franc holdings to strengthen their positions. Haefele also anticipates new all-time highs for gold, as the precious metal benefits from a weaker dollar.
While the weakening dollar may benefit multinational companies’ profit margins, it also raises concerns about potential risks and increased recession fears. The overall impact on the global economy remains to be seen, but the US dollar’s retreat below the 100 level marks a significant development in the currency’s trajectory. Traders and investors will closely monitor future market movements as they adjust their strategies accordingly.
By: Montel Kamau
Serrari Financial Analyst
13th July 2023
Photo Credit: business-standard
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