Is the Dollar Ready to Bounce Back?

The buck looks ready to bounce, at least for the short term.

The US dollar has had a tough few weeks. The US Dollar Index (USD) was trading near $106 in late June. It hit $101 earlier this week. That’s almost a 5% drop – which may not seem like much compared to other assets. But a 5% move in a currency is huge.

Now though, after such a sharp selloff, the buck is oversold. It looks like it’s setting up for a bounce. Take a look at this chart of the US Dollar Index (USD)…

USD is approaching the low it hit last December. At this point, it is historically far below its 50-day moving average line – which makes it vulnerable to a “snap-back” rally.

The momentum indicators at the bottom of the chart are also positioned similarly to where they were last December. The MACD and RSI are in oversold territory. And there’s positive divegence on the CCI.

None of this guarantees a bounce in the dollar, of course. But it pushes the odds in favor of one.

The buck has been selling off recently due to expectations that the Fed will lower its interest rate target following the FOMC meeting in September. Lower interest rates make a currency relatively less attractive. So, traders have been selling the dollar in anticipation of a Fed rate cut.

Now though, the dollar index is in an extremely oversold condition and it’s approaching support. It appears the market has already discounted the adverse effect of an interest rate cut.

That opens up the possibility of at least a short-term rally in the dollar once the cut is out of the way. And, if anything happens over the next couple of weeks to lessen the chances of a Fed rate cut next month, then that dollar rally could get started sooner rather than later.

Best regards and good trading,

Jeff Clark 
Editor, Market Minute

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