- The U.S. dollar index continued its free fall in overnight trading, as it reached its lowest level since April 2018.
Analysts at Goldman Sachs, Morgan Stanley and JP Morgan expect the free fall to continue.
The next target, based on the weekly chart, is $88, the low from February 2018.
The selling off of the US Dollar Index (DXY) accelerated in overnight trading as demand for other currencies increased. It is trading at $90.76, the lowest level since April 2018.
US Dollar Index in free fall
Dollar weakness persists
This year, the US dollar index rose to a multi-year high of USD 103 after the World Health Organization (WHO) declared Covid-19 a global pandemic.
Since then, demand for the currency has declined, causing it to drop by more than 11%. On the other hand, the other currencies that make up the dollar index, such as the euro, the Swiss franc and the pound sterling, have reached multi-year highs.
Similarly, the currencies of the emerging markets have also recovered strongly. The South African rand has appreciated by more than 20%, while the Mexican rand has gained more than 22% of its value. Other emerging market currencies that have recovered against the dollar include the Singapore dollar, the Brazilian real and the Chinese yuan.
And analysts are extremely bearish against the dollar. In a report yesterday, a JP Morgan analyst predicted that the dollar index will continue to fall in 2021. In another report, Mark Wilson, a Morgan Stanley analyst, said the index could fall another 10%. Goldman Sachs expects the dollar to fall 6% in 2021.
Why is the dollar in free fall?
There are three main reasons why analysts are increasingly bearish about the dollar index. First, the rise of a Covid vaccine has eliminated some of the risks in the market. This is because the world may return to normal in the coming months. In other words, there will be no more lockdowns.
Second, Forex investors believe that Joe Biden will receive enough support to flood the economy with record stimulus that will significantly devalue the dollar. He has already promised to offer a multi-billion dollar stimulus when he is sworn in. A further stimulus will come in the form of investment in infrastructure and clean energy.
Third, analysts believe that the Biden administration will lead to better U.S. relations in the world. In other words, there will be no trade wars, which tends to be good for the dollar.
Technical outlook for the Dollar Index
Technical table of the US Dollar Index
On the weekly chart below, we can see that the Dollar Index is on a strong downward trend. This trend is supported by short and long-term moving averages, while the Relative Strength Index (RSI) has continued to fall.
The average directional index, which is a good measure of the strength of a trend, has also continued to rise. These indicators are provided by most Forex spread betting brokers.
As a result, there is a possibility that the index could fall a further 3.3% to reach the February 2018 low of $88.28.