DXY Cracks Support As Dollar Weakens

In recent market reports, we have noted that the dollar may be in the process of establishing a local top, after months of strength.

Following Tuesday's CPI print, which came in below expectations, the dollar weakened significantly. The DXY, an index that measures the strength of the dollar, dropped sharply, crashing through support at 105 and putting in a lower low. It currently stands around 104.4.

Local Top Formed

The DXY appears to have put in a local top just above 107 on October 23, following three months of strong gains. As we mentioned several times, the next obvious support point was 105. The dollar did bounce from this level ten days ago, but this week's CPI print—which reduces the need for further interest rate rises—gave the USD additional downside momentum.

Interest Rate Expectations Shift

Traders are now expecting with 100% certainty for rates to stay on hold at 525-550 bps at the next two meetings, scheduled for December 13 and January 31, 2024. This is a marked change from just a few weeks back, where the odds of a quarter-point rate rise were around 26% and 37% for December and January.

With rates potentially having peaked, it is possible that the dollar will enter a prolonged period of greater weakness—dropping further from those local highs and possibly back towards 100, where it bottomed in the summer.

That would give a tailwind to risk assets, including stocks and bitcoin.

The S&P has reacted very positively to the confirmed dollar weakness, pushing past 4,500, while the NASDAQ is close to its all-time high.

In recent weeks, bitcoin has lost its correlation with stocks, as other factors (such as the prospect of imminent ETF approval) play a more important role. In the future, the dollar's weakness is likely to boost both stocks and crypto.

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