Is The U.S. Dollar Index Forming A Multi-Year Bullish Pattern?


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Although this observation is clearly in the eye-of-the-beholder, it does appear that the U.S Dollar Index (DXY) might be in the midst of forming a broad, multi-year bullish reverse Head & Shoulders pattern that suggests increasing dollar strength for quite a while. If so, the implications of such a technical pattern could have a major impact on the balance of trade, interest rates and general economic growth, if it were to play out.

It is apparent to most observers that economic conditions in the U.S. are improving albeit slowly with yields on 10-year treasury notes nudging higher to close the week at 2.64%. In Europe, however, things are not that rosy yet. Stagnant growth prospects are underscored by a spectrum on 10-year sovereign debt yields that are much lower than those on U.S. treasuries. German 10-year yields closed at 1.26%, with Denmark at 1.43%, The Netherlands at 1.47%, the Czech Republic at 1.57%, Sweden at 1.67%, France at 1.68% and Ireland at 2.31%. 10-year yields in Italy and Spain were slightly above U.S. treasury interest rates closing the week at 2.81% and 2.77% respectively. A set of mixed economic conditions in China along with continued concerns over price stability in Japan (given the drop in household spending since May) are modestly disconcerting as well.

While many other factors must be considered, this focused collection of economic data does suggest that an increase in capital inflows into U.S. dollar denominated assets could begin to accelerate in the months ahead. Factors that could add to dollar strength in the future might include a steeper yield curve, additional job gains, increased domestic oil production, an increase in corporate earnings, an uptick in new home sales and a rise in consumer confidence.

It is worth pointing out, nevertheless, that this potential reverse Head & Shoulders pattern is clearly developing on long-term charts of the DXY. While dollar weakness in the short-run is always a possibility, oversold conditions on long-term (monthly) charts hints that any near-term weakness in the U.S. Dollar Index should be a brief affair.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Forex and Currencies , Economy , Investing Ideas

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