The U.S. dollar index (DXY) retreated broadly from its prevailing bull run in the past two weeks, dropping by up to 3.20% after hitting its two-decade high of 105.
Overvaluation risks grip dollar market
Dollar’s correction in the last two weeks preceded twelve months of relentless buying.
To recap, the greenback’s weight against the basket of top foreign currencies grew by around 14.3% in a year, primarily as markets looked for safe havens against the fears of a hawkish Federal Reserve and more recently the military conflict between Ukraine and Russia.
Cash balances among the global fund managers grew 6.1% on average since 9/11, a recent survey of 288 asset allocators by Bank of America showed. The report also noted that 66% of asset managers believe global profits will weaken in 2022, prompting them to hold “overweight” cash positions.
“The market has hoarded a huge amount of dollars in recent months,” George Saravelos, strategist at Deutsche Bank, told the Financial Times, adding that it is “leading to a very substantial dollar overvaluation.”
Thus, the dollar’s latest retreat may have been an interim correction to neutralize its “overbought” conditions, as the greenback’s weekly relative strength index (RSI) readings also suggested (in the chart below).
From a further technical perspective, the DXY could decline further toward a rising trendline that as support has been capping its downside moves since January 2021, as shown below.
If more selloffs occur, the index is likely to pull back from its current resistance range, with the next downside target at the 0.786 Fib line near 100.
Stronger euro prospects
The DXY also pulled back earlier this week as Christine Lagarde, president of the European Central Bank (ECB), set a new and more hawkish policy on May 23.
Lagarde committed to interest rate hikes by September 2022, thus turning away from ECB’s decade-long dovish monetary…
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