Will the US Dollar get Stronger in 2022?
The US dollar (USD) remains the reserve currency for global trade and international financial transactions. Like any fiat currency, the relative performance of the dollar depends on several critical drivers, including the health of the US economy, geopolitical risk, and market psychology.
Typically, the US economy is an influential factor for global investors to decide to buy or sell dollars. A strong US economy can lead to investors turning to the dollar as a perceived safe currency that offers the best rate of return for their investments. Since investors often search for the highest yield in a relatively safe market, an increase in investment from global investors translates to a favorable capital account balance, resulting in a strong demand for dollars.
The dollar's performance is also heavily influenced by the monetary policies of the Federal Reserve. When the central bank raises interest rates, the USD tends to rise in sympathy. On the other hand, when the Fed lowers interest rates, this can lead to a decline in the USD.
Geopolitical risk and market psychology are other factors that can drive investors in and out of USD. In a risk-averse environment, flight-to-safety inflows cause the USD to rise. In a risk-taking market environment, outflows can lead to a declining USD.
Currently, USD is strengthening and getting stronger as risk-averse flows move into the safety of the reserve currency due to the Russian/Ukraine war. As the Fed moves to tighten rates, it has also triggered a flow of funds into the USD as the world's reserve currency.
What is the technical saying about the USD?
Since 1985, the dominant trend in the US Dollar Index has been a structural downtrend. There have been two counter-trend rallies in late-1997 and late-2014. Each of these rallies faded near structural resistance.
A third breakout occurred in Feb 2022 above 97, hinting at a USD rally toward key resistance at 100.21-102.29 (2015/2016 highs and the 61.8% retracement from the 2002-2008 decline). A breakout signals a retest of pivotal resistance at 105.65 (38.2% retracement from Feb 1985-Mar 2008 decline). The ability to surpass the 38.2% retracement confirms a sustainable rally to 116.11 (50% retracement) and 120.24 (Jan 2002 high).
On the downside, initial support rises to 95-97 (Feb 2022 breakout, May 2021 uptrend, 200-day ma, 10-month, and 30-month ma). Intermediate-term support remains at 88.95-89.89 (2018/2021 lows). Violation here confirms a USD breakdown and warns of the next major decline.
On a shorter-term basis, a cup and handle breakout above 95 (11/11/22) and above 97.44 (2/24/22) have quickly achieved its projected USD target at 100.41. Another overbought condition has developed, suggesting another consolidation is likely between 97-98 and 101 over the near term. Above 100.97-101.14 signals the next USD rally to 103.97 (3/23/22). Below 97 warns of a deeper correction to 94.5-95 (Nov 2021 breakout and 200-day ma).
Since there is an inverse relationship between the value of the US Dollar and commodity prices, will a stronger USD slow down the soaring commodity prices?
Or is the recent USD breakout another temporary counter-trend rally like the previous USD rallies?