Political crises in France and Japan have weakened the influence of the dollar's main rivals, the euro and the yen. The resignations of the French and Japanese prime ministers, along with the upcoming French parliamentary elections, have temporarily made the dollar oblivious to the influence of monetary policy. Following a historic revision to US employment data for March, which showed a decrease of 911,000 jobs compared to the previous estimate, and an unexpected decline in producer prices in August, the likelihood of further easing by the Federal Reserve has rapidly increased.



The US dollar index has been stuck in a narrow range of 97-98 for the past five weeks.

A U.S. federal court ruling allowing Federal Reserve Board member Lisa Cook to attend the September Federal Open Market Committee (FOMC) meeting supported the dollar. Trump's intention to weaken the dollar has led to any policy failures by the president signaling a buy signal for the greenback, a factor factored into trading strategies focused on Fed independence.


(Source of US Dollar Index daily chart: Yihuitong)

For the past five weeks, the US Dollar Index has been trading in a narrow range between 97 and 98. This seesaw pattern has replaced a six-month downtrend and a brief rebound in July. Technically, the current sideways trend is bearish. From a medium-term perspective, the current trend may be merely a corrective rebound, with the magnitude not even reaching the typical 76.4% correction of the previous decline, a sign that bearish forces remain dominant. Meanwhile, the US dollar is near support at a 13-year rising trendline, a level that could be breached even at current levels.

Given the growing market expectations that the Federal Reserve will implement 4-5 interest rate cuts, while other major central banks are not expected to follow suit, we have sufficient fundamental basis to judge that the US dollar may resume its decline at the beginning of the new fiscal year.

The US dollar is at the support level of the 13-year rising trend line

During global economic expansions, the US dollar typically faces downward pressure due to increased demand for riskier, higher-yielding assets other than US Treasuries. Historically, in similar market conditions, sudden and unexpected crises have often helped the US (including the US dollar and US Treasuries) escape self-reinforcing sell-off spirals.


(Source of the monthly chart of the US dollar index: Yihuitong)

For example, the 2008-2009 financial crisis had a more severe impact on economies outside the United States, and the 2010-2011 European sovereign debt crisis had a lasting impact for many years. Subsequently, the 2018 trade war pushed the dollar higher, and the Federal Reserve's ability to raise interest rates aggressively in 2021 also contributed to the dollar's rise.

What all these cases have in common is that during times of severe crisis, markets flock to the dollar for safety. Such crises can actually be beneficial to the US government, not only legitimizing interest rate cuts but also lowering borrowing costs by boosting demand for the dollar.