The dollar returned to strength following the release of US labor market data last week.
In fact, from May 30th to Friday, June 7th, the dollar index fell from 105.1 points to 104.1 points, but then not only did it recover by more than 105 points, but today it rose by more than 105.2 points. .
The current level has often hovered just above 104.5 points since mid-May, or for almost a month.
In fact, until Friday there appeared to be a slight medium-term downtrend, but that trend was interrupted on Friday.
dollar index
The dollar index, also known as USDX or DXY, simply measures the value of the US dollar against a basket of foreign currencies, rather than the value of the US dollar against another single currency.
This basket consists of six foreign currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc, and excludes the Chinese yuan.
Of these six currencies, the euro has the largest weight in the index at 57.6%, followed by the yen (13.6%), the pound sterling (11.9%) and the Canadian dollar (9.1%) .
Generally, an increase in its value means that financial market speculators sell assets and buy dollars, but fluctuations in the exchange rate with the euro obviously also have a big impact.
In fact, immediately after Friday’s spike, the price of Bitcoin, for example, began to fall, dropping from about $72,000 to about $69,000 in the next few minutes.
The dollar index has risen significantly since the beginning of the year, considering that it ended 2023 at 101.4 points.
However, this increase occurred during two specific periods. It reached 104.9 points in January and early February, and then exceeded 106.4 points in the first half of April.
Since then, it seemed like a downtrend was triggered, but it actually went back up to 104 points last week, but that trend may have been interrupted on Friday.
Although the current value is still below the annual high, it is still relatively high compared to the 2024 series.
But let’s not forget that the 2022 bear market even reached 114 points, a value not seen in 20 years.
agent of fear
The dollar index can be used as a proxy for short-term anxiety, given that it often rises when other assets are sold in financial markets.
In fact, it’s common to buy gold if you have long-term concerns, but it’s much better to buy US dollars if you want to sell with the sole purpose of buying it back later at a lower price. .
Considering the past five years, the dollar index before the pandemic was 99 points, significantly lower than its current level. During the financial market crash in March 2020, it rose to 103.2 points in just a few days, but it began to fall sharply due to the Fed’s quantitative easing, reaching 89.8 points in December of the same year.
It started rising again in the second half of 2021, returning to pre-pandemic levels, and starting in March 2022, it reached a new 10-year high in October.
This rally was a clear sign of both the short-term anxiety that was prevalent in financial markets at the time and the ongoing bear market.
But what’s surprising is that it hasn’t returned to pre-pandemic levels, although it came close last July.
US job market: Why the dollar is rising
Friday’s rally could also mark a reversal in trend compared to the declines of the past few weeks, driven by positive news on the U.S. job market.
The reason is simple: the better the U.S. economy performs, the higher the risk of inflation, making it harder for the Fed to cut interest rates.
Because financial markets are highly dependent on liquidity being injected into or withdrawn from circulation, restrictive monetary policies by the world’s major central banks result in bearish effects.
The moment the market understood that the prospect of the Fed’s first rate cut was receding as the US economy was progressing at a good pace, the market reaction was poor and the dollar index’s rise would only indicate a clear uptick. Ta. Fear in the medium to short term.
It’s important to remember that the S&P 500 just hit a new all-time high on Friday, and US stock exchange indexes are still near their all-time highs.
In such a scenario, we would expect the Fed to start cutting interest rates or financial market liquidity to increase again, but the Fed could question such confidence and instead extend its current restrictive They may choose to continue monetary policy. .
