Dollar index breaks above 104: here’s what the charts are signaling

The US dollar’s bullish run continues as reflected by the dollar index (DXY) breaking above 104. The dollar’s surge is nothing short of impressive, considering its magnitude and the implications it has on the global financial markets.

DXY tracks a basket of currencies against the US dollar, such as the euro, the British pound, or the Japanese yen and Swiss franc. By far, the most significant weight in the index belongs to the euro.

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Because the euro trades at the lowest since 2017 against the US dollar, the EUR/USD weakness contributes the most to the rise in the DXY. But the dollar gained across all other currencies part of the basket, with one single exception – the Japanese yen.

The Japanese yen moved into its own world recently. Instead of acting as a safe-haven currency, as it did for so many years, it did not appreciate when the Russia-Ukraine war started. Instead, it did the opposite, as reflected by the USD/JPY exchange rate, which jumped from 116 to over 131 in less than two months.

The Bank of Japan is much to blame. It is the only major central bank diverging from its peers by keeping the monetary policy loose while others began to tighten.

But today’s move in the JPY pairs reflects mostly the safe-haven status if anything else. Fears that the cryptocurrency market may pose a risk to the financial system put pressure on stocks, and so the JPY gained ground across the board.

Coming back to the DXY, can we say that the strength is a surprise? By looking at the daily chart, the dollar has been bullish since late 2021.

Only bullish patterns for the DXY in the last 12 months

In late 2021, the dollar bottomed, as reflected by a double bottom pattern. Since then, the DXY formed only bullish patterns, such as a pennant and a bullish flag.

Interestingly, all these three bullish patterns (i.e., double bottom, pennant, bullish flag) formed ahead of the Fed’s first rate hike. Hence, the market was busy telling traders what the Fed’s tightening cycle would bring.

The question is – did traders listen?

Judging by the velocity of the move, it appears that many have been caught on the wrong side of the market. Being forced to cover at current levels, they push the DXY to new highs.