The U.S. dollar may be emerging from nearly a year of stagnation, with strategists increasingly arguing that the world’s reserve currency is poised for a more sustained advance. The U.S. dollar index has spent the past 11 months in a relatively narrow range. But experts highlighted that recent price action suggests the period of consolidation may finally be ending. Kristian Kerr, head of macro strategy at LPL Financial, said the dollar appears to be breaking out after months of subdued trading. “Breakouts from extended consolidations often see meaningful follow through,” Kerr wrote, adding that foreign-exchange volatility has fallen to near four-year lows. Because volatility tends to balance out over time, “that kind of compression often behaves like a coiled spring, and when it releases, the resulting moves are often both sharp and persistent.” LPL said a sustained move above 103 on the dollar index would strengthen the case that a durable bottom has formed, potentially marking the resumption of the dollar’s secular uptrend. The firm argued that a relatively hawkish Federal Reserve, resilient U.S. economic data and America’s interest-rate advantage over other developed economies continue to underpin the greenback. Bank of America has reached a similar conclusion from a technical perspective. Its strategists said the dollar index has recently broken above a year-long trading range, confirming a bullish head-and-shoulders bottom pattern that points to further gains toward 102.86 and 104.60. BofA said the dollar’s recent price action is closely tracking its 2016-2018 pattern, when the greenback rallied in the second half of 2018 after a lengthy correction. If that historical analogue continues to hold, the bank expects the dollar index to climb toward roughly 103 to 105 during the second half of this year. The implications extend beyond foreign exchange markets. Historically, periods of dollar strength have coincided with tighter global financial conditions, pressure on emerging-market assets and relative outperformance by U.S. equities. LPL also noted that a stronger dollar could reshape cross-asset performance because of the currency’s central role in global liquidity. Not every indicator points towards a dollar rally. LPL cautioned that the biggest risk to its bullish view would be a shift in the Federal Reserve’s tone toward a more neutral stance, which could erode the dollar’s interest-rate advantage. Meanwhile, BofA noted that if the dollar index falls back below key support levels, the recent breakout could prove to be another false start after several failed rallies over the past year.
