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Currencies: Dollar set to finish below key level for first time since June 2021, signaling its rally could be over

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The U.S. dollar, regarded by many as the financial market’s most surefire winner for much of 2022, is having a rough time of late.

The ICE U.S. Dollar index
DXY,
-1.00%
,
which has steadily fallen for the past month, was down 0.9% at 104.82 as of Thursday afternoon and on pace to end the U.S. trading session below it’s 200-day moving average of 105.27 for the first time since June 16, 2021. It’s likely to give up a 368-trading-day streak — the longest stretch on record in which the index has stayed above that technical level, based on data back to 1985.

“A lot of traders might use fundamental information to provide them with a directional bias, but often target and exit trades based on the 200-day moving average,” said Edward Moya, a senior market analyst for the Americas at OANDA Corp.

“It’s one of those indicators that traders use to determine trends in the market, and has strong underlying themes for other assets. When you see the dollar break below it, that signals a major turning point for traders that this trend of a stronger dollar is or could be over.”

Source: FactSet, Dow Jones Market Data

The Dollar Index has been consistently dropping since early November, when October inflation data began to suggest that price pressures may be easing, paving the way for the U.S. central bank to reduce the size and frequency of its interest rate hikes. By the same token, though, the world’s largest economy is experiencing headwinds, as illustrated by data releases on Thursday that revealed U.S. factories face their toughest time since May 2020.

A weaker dollar typically “supports the idea that risk appetite is coming back, which is good for stocks, the euro and the British pound,” Moya said via phone. But “overall, we are still going to be faced with a difficult 2023 because of all the potential credit and earnings risks,” which would tend to drive down stocks and push the dollar higher again.

The dollar tends to perform well against its major peers when U.S. interest rates are rising faster than those of other countries, and when economic growth prospects look brighter here than elsewhere in the world. On Wednesday, Federal Reserve Chairman Jerome Powell signaled that a slowdown in the pace of rate hikes in the U.S. could occur as soon as the central bank’s next policy meeting on Dec. 14. Meanwhile, signs of relief from persistent price gains have emerged in the eurozone, where the annual rate of inflation fell in November for the first time since mid-2021.

“I believe the dollar has reached its peak” unless “there is a surprise spike in U.S. inflation that leads the Fed to be more aggressive in raising rates than [policy makers are] currently telegraphing,” said Arthur B. Laffer Jr., president of Nashville-based Laffer Tengler Investments, which manages about $1 billion in assets.

Market Snapshot: Dow ends nearly 200 points lower as investors weigh ISM manufacturing and inflation data, await jobs report

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