Dollar Index (DXY) Headed to 100

Nov 30, 2021

Brijesh Bhatia, Research analyst

I've made videos in the past about why I think the dollar will get stronger.

I stand by my view. Although, the dollar has been range bound recently, it has broken out on the charts.

In this video, I'll show you how the dollar has become strong over the last couple of weeks and why it's likely to get even stronger in the near future.

Watch the video and let me know what you think.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Well, if you look at the dollar index, it has been talk of the town as it has approached back to the 96 level.

First, let's understand what dollar index is.

chart

So basically, dollar index is used to measure the value of the dollar against the six currencies, which is Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona.

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The index started in 1973 with the base value of 100. It was established shortly after the Bretton Woods agreement was dissolved, and since then, the value of dollar has been tracked with the dollar index.

So let's look at the components and weightages. As I said, it comprises of six currencies over here.

chart

So going by the weightages over here, Euro has the largest weightage, which is around 67.6%, followed by Japanese Yen which is around 13.6%, GBP which is around 11.9%, Canadian Dollar around 9%, Swedish Krona around 4%, and Swiss Franc is around 3.5%.

So let's look at the momentum or the analysis, let's look at it one by one, comparing with the first three, which comprises somewhere around 70-72% of the dollar index. So let's look at the first, which is Euro-USD, which is around 57.6% weightage.

 

If you look at the chart over here, the red curved line is the 200 exponential moving average. We have formed around a double top or a similar structure when it tested around 1.24-1.25 levels. It consolidated for quite long, and now we are witnessing a fresh break down into the Euro-USD.

This means that the euro-USD price is going down and it means that euro is depreciating or getting weaker against the dollar. So the more it falls, the dollar gets stronger and the Euro gets weaker.

So if you look at the momentum, we believe that it has gone below the 200 exponential moving average. If you look at the lower panel, which is the RSI, the blue line, again basically the RSI measures the strength of the momentum. Now, if we look at the black line, it was holding on to the 39-40 levels on the RSI for quite long and now we are witnessing a break down which is again a bearish range shift on the RSI, indicating that the Euro will get weaker and the dollar that stronger.

 

Look at the second chart which is USD-Yen. Now, basically the US-Yen and if you look at the Euro, the base currency there was now the dollar. Now the base currency here is Yen. So in this chart, which is opposite to Euro-USD, it means that when the USD-Yen price goes higher, dollar gets stronger and Yen gets weaker.

After a long, long time it has tested 116-116.5 levels after long years. But still, if you look at it, it's been consolidating in a range. Now the good part for dollar over here is, it's on a weekly scale, trading above the 200 weekly scale.

Now, if you look at the lower panel, the RSI went above the previous resistance line, but it is now trading around the same level. Any move above the 116.5-117, we believe that the dollar in can go up to 120-121, which is very, very negative sign for Yen and slightly for other Asian indices because the Yen is widely tracked into the Asian indices.

 

Now, if I just look at the third, it's the pound to the dollar, the GBPUSD, which comprises around 12% weightage on the dollar index. If you look at the momentum over here, on similar lines trending around 200 exponential moving average. Trending in a range similar to the Yen what we saw. It has been slightly resisting. But if you look at the pound as well, it's been resisting around the similar lines of 200 exponential moving average, trending into a horizontal channel.

Any move, now over here, though it has a weightage of around 12% and the Yen has a weightage of around 13.5%, if I comprises both, which is somewhere around 24-25%, it is still holding at a good support zone.

But we have seen the Euro momentum, it has been indicating that it's been getting weak against the dollar which comprises around 57.6%. So if you look at the dollar index, the momentum is very, very negative for Euro.

 

So the fresh breakout we have seen on the charts as of now, which is around the multiple resistance zone of around 94-95 mark, heading towards 96 as of now. If you look and the structure, it's a double bottom structure. Plus the bullish range shift again on RSI, which indicates that the dollar index is heading for 100.

Now the weekly scale consolidation is very, very huge over here on the double bottom mark. We have seen 94-95 had been resisting. Now the momentum is clearly into the dollar index bulls, which means that the dollar index is about to strengthen. The only thing we think that the weaker currency or the forex would be, the Euro-USD against the major components of dollar index.

So which again, as I said, it comprised around 57% and anything getting weaker over a here, the more the euro weakens, the dollar index is getting stronger and stronger and again as I said, it's the benchmark, which is the benchmark index, the forex index, which is tracked globally and again it might put pressure on other currencies as well.

If the dollar index continues to strengthen towards 100, it will definitely put pressure on other currencies as well across the world. So I believe dollar index is heading towards 99-100 levels into the coming weeks, and the Euro would be the one trigger which will take dollar index towards 100.

We added one chart over here, which is the USDINR, Indian rupee. Though it is not part of the dollar index but we're sharing our view.

 

If you remember a few months back, I have done a video on the USDINR that it is heading towards 80. I still hold my view, though for a longer months of time we are consolidating between 72-75 range for quite long. But if you look at the last week's momentum or last couple of weeks' momentum, we have seen a strong depreciation of rupee against the dollar.

If you look at the chart over here, as I said the weekly 200 red line is in favour of dollar over here and if look at the momentum, any momentum over 75.5-76, could trigger a fast and furious move towards, 77-78 levels and eventually we might head towards 80 levels and I still hold my view of 80 on the USDINR.

As I said, as if dollar index heads towards 99-100, it will definitely put pressure on other currencies though they are not a part of dollar index. But as dollar index it tracked globally, it will definitely put pressure on the other currencies as well.

So I believe that rupee might depreciate against the dollar. Once, technically, the 75.5-76 levels are breached, we might see a fast and furious rally towards 77-78 and eventually towards 80 on towards the USDINR.

Just a conclusion, Euro is the one I believe might head towards 1.0-1.05, which is around 4-6% and if I just look at the dollar index towards 100, 4-5% over there, which might take triple digits on the dollar index.

So keep a watch on this. Again, I've done a video on a comparison with the dollar index and Nifty in case you want to check out how they perform, how the Nifty performs against the dollar index, go to our archives and check the video. I have done a detailed comparison of the dollar index move with the Nifty.

So signing off. Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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