- The US dollar index is under intense pressure as the overall risk-on sentiment remains.
- The new Covid vaccines and the recent election of Joe Biden has reduced global risks.
- But analysts at HSBC are warning that investors have become too bearish on the currency.
The US dollar index (DXY) is under intense pressure as the overall risks to the global economy ease pushing forex investors to riskier assets. The index is trading at $90.71, which is the lowest it has been since April 2018.
King dollar dethroned
The US dollar has dropped against most currency peers in the past few months. It has dropped by 14% against the euro, 17% against the British pound, and 27% against the Norwegian krona.
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It has also dropped sharply against emerging market currencies like the Mexican peso, Singapore dollar, and the South African rand.
This price action has happened as the overall risks to the global economy wane. For one, countries have started planning about Covid vaccinations. As a result, countries will likely return to growth in 2021.
At the same time, the Joe Biden administration is likely to favour diplomacy over threats. In his recent statements, Biden has talked about the importance of maintaining relations with traditional American allies like Europe and Canada. He has also talked about the need to implement large stimulus and spending programs in the economy.
All this has pushed most analysts to remain pessimistic about the dollar. In interviews last week, analysts at Goldman Sachs, JP Morgan, and Morgan Stanley warned that the currency will continue being under pressure in 2021.
Still, as pointed by an HSBC analyst, there are risks to this thesis. He argued that the dollar will possibly bounce back in 2021 as the risk-off sentiment returns. For one, there are risks of deadlock in Washington as Republicans are set to control the senate. Also, there are risks on global debt, which has risen to more than $273 trillion.
The US dollar index is under pressure two days after the Bureau of Labour Statistics released weak nonfarm payroll numbers. In November, the economy added just 245,000 jobs, the lowest number in the past few months.
US dollar index technical outlook
On the weekly chart, we see that the dollar index has been on a sharp downtrend and is at its lowest level since April 2018. It has moved below the 50-day and 25-day weighted moving averages while the Stochastic oscillator has dropped to the lowest level since July 2017. The price has also moved below the bearish pennant showed in yellow. Therefore, the index will likely continue falling as bears attempt to move below the support at $90.