Last week the U.S. Dollar Index ($DXY) notched a three-plus-year low. The USDX is a basket of six major currencies weighted against the greenback and it has been trending sharply lower since early January.
However, there are now some early clues the USDX has, or is close to, forging a market bottom. If so, that would be a big deal for the marketplace. I’m going to lay out for you my case for a market bottom indeed being in place for the USDX.
Technical Clues Emerge Suggesting USDX Bears Have Run Out of Gas
The monthly continuation chart for nearby U.S. Dollar Index futures shows some interesting correlations dating back to 2008. All the longer-term price downtrends in the USDX since 2008, such as the one occurring at present, tend to fizzle out in less than one year. The only exception is the price downtrend that began in June 2010 and lasted exactly one year.
Also dating back to 2008, the Relative Strength Index, overlaid on the monthly chart, reached a level just below 30 in June that, over the past 17 years, has foretold major market bottoms being in place in the USDX.
Fundamentals Are Turning Bullish for the Greenback
Recent U.S. economic data has been upbeat and reveals a resilient U.S. economy. Last week’s jobs report from the Labor Department showed total nonfarm payroll employment increased by a larger-than-expected 147,000 in June, and the unemployment rate at 4.1%. The unemployment rate has remained in a narrow range of 4% to 4.2% since May 2024.
In the meantime, the general market has not deemed U.S. inflation levels to be problematic. Yet, the Federal Reserve has reiterated its stance that inflation levels remain a bit too high. The May Consumer Price Index (CPI) report showed an overall annual inflation rate of 2.4%, a slight increase from the previous month’s 2.3% rate. That was mainly due to rising prices for food and transportation services. The “core” inflation rate, which excludes food and energy, remained at 2.8% for the third consecutive month.
A healthy and expanding U.S. economy and still-sticky inflation are not fundamental elements that are conducive for a central bank to lower interest rates. Rising U.S. Treasury yields just recently also suggest no interest rate cuts coming from the Federal Reserve any time soon. This scenario is U.S. dollar-bullish.
Also, the overall global trade front has not turned into all-out global trade war that many market watchers had feared earlier this year. The situation is still evolving, but President Donald Trump now appears a bit more conciliatory regarding getting trade deals done, while at the same time extending deadlines for such deals to be completed. This is also friendly for the greenback.
If the USDX Has Bottomed Out, What Does That Mean?
An appreciating U.S. dollar on the foreign exchange market would make all the raw commodities that are priced in U.S. dollars on the world trade markets more expensive to purchase in non-U.S. currency. That’s seen by most as price-bearish for U.S. commodity markets, from a global demand perspective.
However, I will argue that a more robust U.S. economy would help drive better growth in the other major world economies. A stronger U.S. economy means more demand for global goods and services. In fact, the prospects for increased global consumer and commercial demand amid stronger major economies would way more than offset the negative demand implications of an increase in U.S. raw commodity prices due to a stronger U.S. dollar.
Bottom line: Raw commodity bulls should embrace the likely rebound in the U.S. dollar index in the coming weeks or months.
On the date of publication, Jim Wyckoff did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
