Source: Investing.com

The US Dollar Index (DXY) has undergone two notable downward corrections in November and has maintained a consistent downward trend since reaching its high of 107.11, resulting in a decline of approximately 3.2%. What precisely is influencing this drop in the US Dollar Index?

Now, let's explore the factors contributing to this outcome.

The rise in the US Dollar Index in the past was influenced by several factors.

The story takes us back to the pandemic period. As the pandemic struck, the United States swiftly reduced interest rates to zero and continued quantitative easing, resulting in an increased circulation of US dollars in the market. During that time, the US dollar also underwent a period of decline.

Source: Investing.com

The Federal Reserve's unexpected announcement of a rate cut from 1.25% to 0.25% in March 2020 triggered an immediate weakening of the U.S. dollar index, which persisted for nine months, reaching its lowest point between December 2021 and June 2022.

This decline can be attributed to several factors:

1. The Federal Reserve's decisions diverged from market expectations, leading to a prolonged period of market adjustment.
2. A sudden decrease in US interest rates made currencies of other countries comparatively more attractive. This trend continued until other nations mirrored the US rate cuts, gradually reducing their attractiveness and stabilizing the US dollar index.
3. The economic standstill during the pandemic resulted in reduced demand for the US dollar.

Understanding the factors influencing the drop in the US dollar index before the pandemic helps pave the way to further explore the subsequent rise in the index.

Source: Investing.com

Based on the chart, we've identified three phases when the US dollar index began to strengthen:

Phase One: Countries began lifting restrictions, initiating economic recovery (depicted in the green column).

During this phase, nations gradually reopened and revitalized economic activities, sparking a resurgence in international trade. As the US dollar is the primary currency for most commodity transactions worldwide, the revived international trade increased the demand for the US dollar. This initial uptick in the US dollar index set the stage for the subsequent two phases, which were pivotal in contributing to the significant rise in the index.

Phase Two: The Onset of the Russia-Ukraine War (indicated in the red column).

The commencement of the Russia -Ukraine war wielded a profound impact on the global landscape. With Russia and Ukraine situated in Eastern Europe, neighboring countries like Poland, Romania, Germany, and Austria faced potential risks. Initially uncertain about the conflict's scale, European nations grappled with the question of asset security. Seeking safer alternatives, attention turned to the United States, a leading global power geographically distant from the conflict. Consequently, there was a significant shift of assets into US dollars, deposited in the US as a perceived secure haven.

Moreover, given that the Euro constitutes over 50% of the entire US dollar index, the Euro's reaction to the US dollar holds paramount importance. This led to a substantial rise in the US dollar index during this second phase.

Phase Three: Federal Reserve Raises Interest Rates (depicted in the blue column).

In this phase, the primary focus shifted to 'inflation,' a trend that had been brewing since the initial phase's early days. As countries lifted COVID restrictions, disrupted supply chains led to goods scarcity and subsequent price surges. Furthermore, the Russo-Ukraine War heightened international crude oil prices, exacerbating inflation in the United States. By 2022, inflation reached its peak (the first time the US faced inflation above 9.1% since pre-1980). Amid supply chain disruptions and soaring international crude oil prices, inflation surged in the United States, prompting the Federal Reserve to contemplate interest rate hikes.

This economic scenario likely prompted savvy traders to position themselves for a bullish trend in the US dollar.

Source: Investing.com

As the three phases continued to unfold, the US Dollar Index eventually peaked between September and November 2022. During this period, signs of declining or slowing inflation emerged, and the impact of the Russo-Ukrainian conflict didn't extend significantly to other countries. Consequently, the US Dollar Index gradually began to decline, fluctuating within the range of 100 to 105. Throughout this time, the Federal Reserve oscillated between dovish and hawkish approaches, carefully managing public expectations to prevent market panic. This cautious approach helped maintain the US Dollar Index in a consolidation phase.

The US dollar seems to show signs of weakening, how is this evident?

Source: Investing.com

Recently, the US Dollar Index has been notably trending downward, notably marked by two substantial bearish candles that distinctly breached the support level in a straight line. These two significant bearish movements occurred on November 3, 2023, and November 14, 2023, drawing particular attention to their timeline.

Source: Forex Factory

On November 3, 2023, the United States released the non-farm employment figures. This time, the numbers were worse than both the previous data and expectations. Weaker employment figures typically suggest an economic slowdown, which, in turn, is seen as favorable for declining inflation. Consequently, based on these expectations, the public might anticipate that a decrease in inflation could potentially signal an economic downturn. This scenario could prompt the Federal Reserve to consider lowering interest rates as a measure to navigate the economy through a potential recession.

Source: Forex Factory 

On November 14, 2023, the United States released its inflation data, revealing a Year-over-Year (YoY) rate of 3.2% and a Month-over-Month (MoM) rate of 0%. Following this report, the market grew more convinced that the Federal Reserve wouldn't proceed with further interest rate hikes. In fact, there's a strong likelihood that they might accelerate the schedule for interest rate cuts.

Should the United States initiate interest rate reductions, the appeal of its currency would likely diminish, leading to a continued decline of the US dollar index towards 100.

Next economic data worth paying attention to

The upcoming crucial economic data to monitor will be the GDP. A slowdown in the growth of the US economy could pose a worst-case scenario, potentially leading to a recession. Consequently, if GDP growth starts declining, the Federal Reserve might contemplate an earlier decision to cut interest rates. Such a move could further hasten the decline of the US dollar index.

The market embodies the collective attitudes of all participants. Each individual's decision influences market trends. Therefore, predicting the market in advance necessitates forecasting the overall reactions of all participants. For instance, traders' expectations regarding the Federal Reserve's actions and the Fed's assessment of economic trends are intricately linked. Mastering the deduction of event progression allows positioning oneself ahead in trading and capitalizing on price differentials to generate profits.

Great news! Double campaign, double benefits!

[First Campaign] VC Course Exclusive Offers

VC Plus is currently running a year-end promotion. All you need to do is join any VC webinar and open a VC Plus account before the promotion ends.

There are three different tiers of promotion:

Promotion 1: 100% discount
Join webinar + Open VC Plus account + Deposit USD 500 within 14 days

Promotion 2: 30% discount
Join webinar + Open VC Plus account + Deposit USD 100 within 14 days

Promotion 3: 10% discount
Join webinar + Open VC Plus account

Know more about the VC Plus course:
https://mqac.i3investor.com/mqtrader/mqdemy/landing/course/desc/36/intermediate

Promotion only valid in 2023

*T&Cs apply

[Second Campaign] VCPlus Real Trading Contest, Win IPad 9th Gen

Tournament Period: 06/11/2023 - 03/02/2024
Duration: 90 days
Platform: VCPlus

Gear up for an electrifying experience at the VCPlus Real Trading Contest! We're delighted to invite you to the ultimate showcase of trading skills, where you could be on the verge of winning incredible prizes. And the best part? Your entry into this thrilling competition is just a few clicks away!

Register now to showcase your trading prowess:​https://bit.ly/3P8vNgD

Click here to learn the steps to join this campaign!

Terms and conditions apply

Seize this opportunity by making a one-time deposit of USD 500 to qualify for both campaigns. Don't miss out!