The dollar index rose to a new high on the nearby contract on March 7 when it rose to 97.665. The recent strength of the greenback was more likely a bearish comment on the euro currency which accounts for 57 percent of the index.
Last week, the European Central Bank offered a bearish picture when it comes to economic growth in the Eurozone. Even though quantitative easing ended in 2018, the central bank has no plans to reduce their balance sheet or to increase short-term rates given the current sluggish state of economic conditions. Therefore, it is likely that short-term rates will remain at the negative forty basis point level for the rest of 2019, and perhaps for even longer.
The vast gulf between the US dollar and euro currency short-term rates stands at 2.65-2.90 percent. Both the dollar and the euro are reserve currencies, but the dollar offers a yield while holding euros involves a cost. Therefore, it was no surprise that the dollar index rallied last week to a new high on the nearby contract. However, it was a surprise when the dollar failed to follow through on the upside and rise to a new peak on the continuous contract.
As the weekly chart illustrates, the peak in the dollar index came in mid-December 2018 at 97.705. The recent rally took the index to just shy of that level which is technical resistance. The failure of the dollar to make a higher high likely led to the recent weakness that took the index back below the 97 level.
Aside from being the leading reserve currency in the world, the dollar is the benchmark pricing mechanism for most commodities prices. There is a long-standing inverse relationship between the value of the dollar and raw material values. When a market should move higher, and it does not, it often reveals an underlying weakness. Price volatility in currency markets tends to be low compared to other assets. Central banks and monetary authorities around the world tend to manage the foreign exchange market to achieve stability.
Commodities are assets that are in the crosshairs of the current trade dispute between the US and China. A lower dollar could be a tool in the negotiations as it makes US exports more competitive on global markets. Therefore, it is possible that the US is managing the level of the dollar against other world currencies and standing in front of any break to the upside while the talks with the Chinese continue. Meanwhile, the failure of the dollar has been a supportive factor for many commodities prices. Copper remains above $2.90 per pound, crude oil was at the $58 per barrel level, and gold is back over $1300 per ounce as of March 13.
The dollar stalled and could not climb to a new high which could lead to another downside correction in the greenback index. Technical support stands at the February 28 low at 95.715. A move to that level or below could ignite commodity prices over the coming days and weeks.