On March 4, we wrote about how the dollar is gearing up for its next move.
Since then, the dollar index (DXY) has sold off as much as 1.54%.
For many stocks, that’s not a big deal. But for the world’s reserve currency? That’s a big move.
The dollar’s weakness has to do with recent comments by the Federal Reserve.
On March 6, Fed Chair Jerome Powell testified before Congress.
Powell reinforced the Fed’s position that interest rate cuts are still likely to come in the following months.
And because, generally speaking, lower interest rates mean a weaker currency, the dollar bears came out in force.
Of course, Powell did qualify that any rate cuts would be “data-dependant.”
That means the Fed wants to see key economic indicators fall in line with their inflationary calculations.
In other words, the economy needs to cool off a little bit more before the Fed can seriously consider cutting rates.
A Mixed Reaction
In that regard, last Friday’s employment reports were a mixed bag.
On the one hand, wage growth has slowed. And the pace of job creation, layoffs, and hiring activity also slowed relative to where things were in December 2023.
But on the other hand, new job openings continue at a blistering pace. In fact, this latest jobs report saw the economy add 75,000 more jobs than most economic analysts expected.
And just like the data, the market’s reaction was also mixed.
The dollar initially sold off hard, with DXY dropping by 0.5% in a matter of minutes.
But by the end of the day, DXY was virtually flat.
This leaves the dollar in a temporarily uncertain position, just like the Fed’s plans for future rate cuts.
But just as the Fed will indeed eventually end up cutting interest rates, so too will the dollar eventually fall to new lows.
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Patience Is Key
On this price chart of DXY below, you can see how the dollar has now reversed about 50% of the rally that’s taken place since the beginning of the year.
My expectation is that DXY will steadily trade lower, eventually taking out the December 28 lows of 100.25.
But in the short term, we can expect a relief rally.
The dollar’s had a big move lower over the last four weeks. This has resulted in oversold conditions.
Currency traders should remain patient with the dollar. Trying to establish short positions right now isn’t the best play.
Wait for the market to bounce and for those oversold conditions to dissipate. Once they do, the dollar could be ready for its next big move lower once again.
Happy trading,
Imre Gams