This article was written exclusively for Investing.com.
It had been quietly rising in recent weeks. Based on an analysis on the technical chart, it may now be on the verge of making a serious leap forward. At the same time, it started showing signs of a serious collapse.
As the US prepares to pass a new stimulus package, growing prospects outweighing fears of increasing borrowing has provided a strong backwind to the dollar, which helps boost Treasury bond yields, steeping the revenue curve and moving the gap with shorter-term bonds to levels not seen since 2017 taking out. In addition, the gap between US and European bond yields widened, potentially helping the dollar to rise against the euro.
The dollar index made a meaningful breakout with a potentially bullish reversal pattern known as an inverse shoulder head to shoulder. As a result, the index recorded a rapid rise towards a resistance zone around 91.80. However, if the index breaks the resistance at 91.80, it can rise to the level of 94.10.
Dollar Index Daily Chart
The sharp increase in the dollar could be due to the serious weakening of the euro. The euro fell below 1.20 against the dollar on February 4th for the first time since December 1. As a result, the euro may drop to 1.16 and return to its long-term bearish trend that it had crossed in October.
The strength in the dollar came at a point where 10-year Treasury bond revenue rose sharply towards around 1.15% and had the potential to reach even higher levels from that point on. Recently published data indicate that the US economy is recovering. At the same time, the payment amounts recorded in the report rose to their highest level since 2011. If we add additional incentives to this, the momentum gained recently in 10-year Treasury bond revenue may be enough to carry itself into technical resistance at 1.35%. 30-year bond revenue also rose sharply and could jump to around 2.15%, based on a similar analysis.
US 10-Year Treasury Bond Income Daily Chart
Rising bond yields led to the expansion between US 10-year and 2-year bond yields to their largest level since July 2017. Between the US and German 10-year bond yields also rose dramatically, from 1% in the spring of last year to now 1.6%.
US 10 and 2-Year Treasury Bond Income Spread
Rising bond yields and prospects for additional growth undoubtedly helped the dollar recover. But a rising dollar is not a good development for everyone. As with emerging markets and stocks in these markets, the commodity is likely to be affected by the negative consequences of this. This rise can also potentially hurt risk-based trading and could end the massive rally seen in emerging markets and some commodity prices.
In addition, such a development could create a problem for the general market. A strong dollar can create counterwinds for multinationals and hurt revenue and profits. However, this would only be a short-term problem. As the dollar starts to stabilize, counterwinds that could damage income and profits will return to normal.
If this expectation is true and the US economy is recovering faster than other economies, the dollar’s recent rally could be the beginning of a long-term bullish move towards returning to pre-epidemic levels.