The dollar is still king - an asset to hold for now

Priyanka Sachdeva

THE dollar has been soaring for almost all economic, geo-political and technical reasons and still looks bullish. The Federal Reserve has been raising rates aggressively, enhancing the overall appeal for the dollar for two major reasons - safe haven flows and comparatively higher yields. The US dollar is a classic safe-haven and the current geopolitical situation is arguably making it more appealing amid mounting worries of an impending recession. The stronger US dollar is a side-effect of rising rates as dollar assets offer higher yields which in turn encourage investors to sell local currency and invest in dollars.

After a strong rally to its recent high nearing the 115 level, we witnessed a brief drop in the Dollar Index futures last week. So the obvious question is whether one should still be bullish on the US Dollar Index. Is the dollar still king? Well, surprisingly, the answer is yes. It is an asset to hold for now.

If we look at the historical monthly chart of the Dollar Index Futures (DXY) traded on the ICE Exchange, it is sloping upwards. A retracement of the previous top and bottom from 2001 to 2008 shows the top 121 is not far and will be tested sooner than one expects. In fact, there is not much resistance after the level of 115.

The parallel up trending channel lines joining historic highs and lows since 2010 reflect the dominant uptrend bias. Technically speaking, whenever we have trending channel lines, the upper line, despite offering weak resistance, has been used by savvy traders to take money off the table as the top channel line commands the respect of chartist. Thus, we witnessed a drop from the recent high of 115.

Once the uptrend top line from 2001 breaches 116, we will likely witness another accelerated upswing. The regression line (76.4%) of 109 and psychological level of 110 act as a picture-perfect tested support; as such, we can expect the Dollar Index to consolidate between the levels of 110 to 115 for the month of October. Topsy-turvy sessions are well expected in October, historically infamous for wilder fluctuations and volatility. We may see bulls jumping in for opportunities to buy on dips to benefit from smaller upswings.

We believe that the US Fed Reserve has got the persistence and magnitude of inflation wrong. The monetary policy will likely need to be restrictive for some time for the Fed to have confidence that inflation is moving back to the target of 2 per cent. The policymakers have time and time again reflected the Fed's firm hawkish stance and even a recession is unlikely to derail it from raising rates further. Recession looks inevitable and approaching. In fact, the only reason we have yet to go into one is a strong job market in the US. Given the era of rising rates and divergence in policies of central banks across the globe, interest rate differentials have added to the appeal of the dollar.

Synchronised global growth is the best environment for a lower USD, but that is nowhere to be seen. Other catalysts, such as China easing its zero-Covid policy or easing European energy fears, also look well beyond the horizon as is the Fed pivot. 

The writer is market analyst at Phillip Nova

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