The Breakdown of the US Dollar

The US Dollar (USD) has a bad week so far. In fact, ever since the Fed opened the swap lines to provide liquidity to the financial system in early April, the USD fell across the dashboard. 

In particular, the pandemic started large appreciations of reserve currencies other than the USD. As such, the AUDUSD, GBPUSD, EURUSD – they all rose several big figures since their March lows. Also, the USDCAD, USDCHF, or USDJPY have a hard time finding decent bids.

So, where is the USD going? This week started just like the previous one ended, with the USD melting. Some voices already talk about the demise of the USD, considering that commodities like gold and silver rally as well.

Where is USD Going?

The USD is facing several headwinds, and that is why everyone talks about the coming melting. First of all, the Dollar Index (DXY) seems to have peaked at the 100 level. Moreover, after three attempts to break higher, it is currently testing the rising trendline seen in the chart above. Furthermore, if the trendline breaks, the DXY puts a triple top pattern – a reversal pattern with a measured move pointing to much lower levels.

However behind simple technical analysis and indicator’s interpretations, there are always the big players to watch. In particular, central banks often intervene to manipulate their currencies. It is not only the Federal Reserve of the United States (Fed) to consider when thinking of the USD, but every other central bank on the face of the earth, as most debt is dominated in American Dollars.

A study ran by the International Monetary Fund (IMF) together with the World Bank, and the Sovereign Wealth Fund Institute revealed important financial centers were involved in currency manipulation in the two years of study (2017 – 2019). Switzerland, in particular, played and still plays an important role in this regard.

Data published by the Swiss National Bank this year reveals that the SNB purchased large quantities of USD, EUR, and other reserve currencies from March to May this year. Later data is not available yet. But countries with large trade surplus like the SNB should purchase weaker currencies so as not to deflect currency appreciation into countries with a trade deficit. Yet, the SNB did exactly the opposite.

The story tells us that the USD may just be an intermediary, the counterparty in an exchange of flows from some countries to other ones. The COVID-19 pandemic made each country act for its own interests and changed the way financial markets moved.

It should not come as a surprise to find out later this year that the triple top visible now on the DXY is actually the horizontal base of an ascending triangle – a continuation pattern pointing to higher, not lower values.

After all, technical traders have a saying – triple tops rarely hold.

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