Will Dollar Trend Lower?

Two months ago, the dollar was rallying, and touched its 200-day moving average, suggesting that it was ready to break higher. Technical analysis matters a lot in the foreign exchange markets, and that moment helped traders decide that they weren’t prepared to take it higher. Now the dollar is at another possible parting of the ways. If the dollar were to drop further from here, it would set a new seven-year low, and strengthens the belief that it is now in a secular downturn.

Against the dollar, the Chinese RMB has appreciated significantly, and has now regained all the ground it lost amid the “trade war” tariffs of late 2018. With the exception of a brief period in early 2018, it hasn’t been this strong since the infamous devaluation of August 2015, marked in the chart.

One way to put the relationship between China and the dollar involves the commodity market. When China is booming, demand for raw materials tends to be higher, and so a strong yuan and strong commodity prices tend to go together. Since the 2015 devaluation, the following chart shows that the yuan has very much followed resource prices:

John Authers, Senior Editor For Markets, Bloomberg

Will the dollar trend lower? It looks to be one of the critical questions to answer in June. On balance, we should prepare for a major period of dollar weakness — unless the next raft of data shows that inflation really does take off in the U.S. and forces the Fed into tightening earlier than it wants.

Reference

Bloomberg, 2021-05-28, “Dollar May Be on Brink of Sustained Downtrend”