Since the year began, the U.S. dollar has been falling almost uncontrollably, but there are some technical indicators that momentum may be turning in the right direction and that a temporary bottom may have been reached.
Tuesday saw a 0.6% increase in the ICE U.S. Dollar Index DXY, which measures the value of the dollar relative to a basket of the major trading partners of the United States. Three days prior, the dollar index had dropped 9.7% year-to-date and finished at its lowest level since March 2022.
Since the top of each bounce is below the peak of the preceding bounce and each low is lower than the previous low, it looks as though this year’s downtrend is firmly established.
However, behind the surface, it seems that bulls are preparing to jump and bears have lost some control.
The relative-strength index, a commonly used measure of underlying momentum, has been climbing from a low last week that was much above the April low, even though the dollar index’s low last week was below the April low.
Because the divergence is frequently resolved in the direction of the RSI, chart watchers refer to this pattern of declining prices and increasing momentum as bullish technical divergence.
In September 2024, a similar pattern emerged, and a significant dollar rise ended that divergence.
Additionally, similar to last year, the RSI’s most recent higher high and higher low came after a decline below the 30 mark into oversold territory, which happens when a selloff lasts far longer than usual.
There are more indicators that a bounce is imminent. Investor mood has risen to a pessimistic level that hasn’t been witnessed in 20 years, according to a Tuesday article by Steve Goldstein of MarketWatch.
Additionally, for the previous few months, the yield on the 10-year Treasury note BX:TMUBMUSD10Y has been climbing, which coincided with the RSI’s rebound.
Since higher rates tend to make the currency more appealing, there is usually a fairly strong link between the dollar and 10-year Treasury yields. According to a BourseWatch examination of FactSet data, the correlation over the last five years has been 0.86. A correlation of 1.00 indicates that the data move completely in sync, while a correlation of 0.00 indicates that the data move inversely.
However, the correlation has retreated to just 0.42 so far this year, and even a small return to the mean would offer some support for a dollar rebound.
Given that the dollar index is less than 0.3% from a downtrend line that began at the high of February 28 and connected to the high of May, it wouldn’t take much to reverse the trend, at least in the near term. The March high, which is just below 102, would be a crucial possible resistance place to keep an eye on if that line fails.
The trend of lower highs would be broken if the dollar index could rise above the close of 101.79 on May 12.
On the downside, the bounce scenario would be called into question if there was a break below the June 12 close of 97.92 along with a decline in the RSI.
