The US Dollar Index $DXY hasn’t left our macro checklist all year.
It remains one of the most important charts for risk assets everywhere, as well as the anchor for the “weak dollar trade.”
Since our last update in May, the dollar has done what weak assets do: drift lower.
The big picture hasn’t changed. This is still a weak-greenback environment. The only debate right now is how the tactical swings play out along the way.
So, let’s talk levels.
On a structural basis, the breakdown beneath 100 was decisive. Looking at the futures market, that’s where the long-term anchored VWAP from the COVID lows came into play. It had supported rallies for years, but now it has turned into key resistance.
As long as DXY remains below this level, and rallies fail to reclaim the VWAP, the trend is lower.
Now zooming into the tactical setup, two additional levels stand out.
First is 98.20, the May high VWAP. Every rally attempt since has stalled there. Above it, the dollar still has to wrestle with the COVID VWAP near 100.
On the downside, 96 marks the shelf of pivot lows that have supported DXY since this summer. Lose that, and the next leg lower is in play.
Could the dollar bounce? Sure. It always can. But unless buyers reclaim those levels with authority, this is still a downtrend.
And the intermarket evidence agrees.
The cleanest confirmation comes from the Emerging Currency Fund $CEW—an equal-weight basket of 15 EM currencies versus the dollar from our friends over at WisdomTree.
Here it is, breaking out of a multi-year base.
A valid breakout above 18.825 will go a long way in confirming our weak dollar thesis, as the path of least resistance for Emerging Market currencies will shift higher.
As long as these trends persist and these levels hold… expect the dollar to remain in a downtrend, acting as a continued tailwind for risk assets around the globe.
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