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Monday, March 1, 2021

US dollar index slides to 2-week low as US risks ease

  • The US dollar index is under pressure as investors start to fade their risk aversion trades.
  • Donald Trump’s health has improved and congress is making progress on stimulus.
  • Services PMIs from Europe and the US were also better than expected.

The US dollar index (DXY) is under intense pressure as traders wind-down their Friday’s risk aversion trades. It is down for the second straight day and is trading at the lowest level since September, 21.

US dollar index
US dollar index declines

Risk aversion abates

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On Friday, the US dollar index rallied after Donald Trump revealed that he had the coronavirus. This rally was mostly because of risk aversion as investors moved to the safety of the greenback.

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In the past few days, these risks have abated. The president’s health has improved and his doctors are painting an upbeat picture. He left the hospital yesterday.

Still, with no vaccine, the pandemic remains a key concern especially now that it is in the highest office in the US. Some of the senior officials with the disease are the first lady, press secretary, and the chief campaign manager.

Meanwhile, the risk of no stimulus has also improved. While Nancy Pelosi and Steve Mnuchin have not reached a deal yet, they have both sounded optimistic. Indeed, with the president infected, the two sides could be under renewed pressure to pass a bill. Experts, including those at the Federal Reserve have said that another stimulus is needed to cushion the economy from the impacts of the pandemic.

The US dollar index has also been under pressure because of positive developments abroad. In Europe, there is hope that the UK and the EU will reach a Brexit deal in the next few weeks. Similarly, manufacturing, services, and composite PMIs from the region were better than expected.

Yesterday, the dollar index also reacted to the strong non-manufacturing PMI data from the Institute of Supply Management (ISM). The data showed that the non-manufacturing PMI rose from 56.9 in August to 57.8 in September. That happened as the business activity index and employment rose. However, the prices index declined to 59.0.

Also, the labour market has been relatively strong. Last week, numbers from the Labour Department showed that the unemployment rate fell to 7.2% while the economy continued to add jobs.

US dollar index technical outlook

US dollar index
US dollar index technical chart

The four-hour chart shows that the attempt by the US dollar index to rally ended on September 25, when it reached a high of $94.75. At the current level of $93.38, the price is at the lowest it has been since September 21. The price is below the 25-day and 15-day exponential moving averages. It is also between the 38.2% and 50% Fibonacci retracement level.

Therefore, it seems as if bears have prevailed, which means that the index will continue falling as they target the 50% retracement level at $93.26. Get access to our free forex trading courses and guides here.

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