Here we go again…

On June 21, readers were alerted to a bearish signal in the U.S. Dollar Index (DXY).

Since then, DXY has declined nearly 4%.

Every time there’s a reasonably big move in the dollar, you can bet that extreme opinions are going to start trending.

There are usually one of two hot takes…

On the one hand, it’s the death of the dollar. On the other hand, we’re entering a new period of complete dollar dominance.

The truth is usually a lot more boring.

The dollar will frequently lead major currency trends around the world. This results in an echo effect that takes time before the currency market stabilizes.

It’s all because of the dollar’s status as the reserve currency of the world.

Practically everyone around the world must have at least a few dollars on hand. There’s actually more dollar-denominated debt outside America than within it. That’s because the dollar’s used so often in international trade. 

So whenever the Fed marks a shift in monetary policy, many other countries must follow suit. If they don’t, then the dollar-denominated debt they hold will be increasingly more expensive to pay back.

Monetary policy takes quite some time to filter through the system. That’s why it took several months, and numerous interest rate hikes, before inflation started to meaningfully decline.

Once the Fed started raising rates in early 2022, central banks around the world soon followed.

Generally speaking, higher interest rates will see a currency go up in value against its peers. Falling rates will see it weaken.

That’s why when the Fed started its rate hiking cycle, the dollar soared. And as the Fed got closer to a pause in rate hikes, the dollar began to fall.

When the Fed started hiking, other central banks were behind the curve. And right now, while the Fed is contemplating a pause in rate hikes, other central banks might not be finished with their own hiking cycles.

Once the Fed and its international peers are back in sync, the currency markets should stabilize.

But we’re still far from that event taking place. That means currency trading opportunities are still there for the taking.

And now that we’ve seen a pretty big move in DXY, the currency markets are primed for additional volatility.

Next week we’re going to walk through an updated chart of DXY to see where the next big trades are likely to be.

Until then, happy trading,

Imre Gams

Have you been following along with DXY?

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.