The U.S. Dollar Index (DXY) is breaking below key support levels and on the verge of what we think could be a significant multiyear decline.
Decline from Early 2020 Peak
The dollar peaked near $103 at the height of the rally in risk assets earlier this year. However, since then, it has traded in a narrow band (see chart on the left) until recently when it broke below
the low end of that range. With that support now breached, the next key test for the DXY will be the $92-$94 zone, defined by the upward-sloping trend line in place since the 2011 lows.
Technical indicators suggest the dollar is likely to consolidate losses around this level before resuming its decline. Therefore, any countertrend rally should be viewed as temporary in nature. Indeed, speculators have crowded into the “short dollar” trade, which could spark a rebound in the dollar’s value on profit taking. However, the dollar is a momentum currency, and tends to move in long cycles, rallying for a decade or more followed by a lengthy decline.