According to a recent analysis by BCA Research, the U.S. dollar’s broad trade-weighted index suffered a significant technical breakdown after becoming oversold in the first half of the year.
While the dollar may find some short-term support, BCA cautions that any gains “will not last for long.” The firm views the technical breakdown as a sign that the dollar could face prolonged weakness moving forward.
The relative strength of the US equal-weighted equity index compared to its global counterpart is struggling to regain upward momentum. BCA highlights that this ratio “has been a good compass for the greenback, and it spells trouble ahead for the US dollar.”
A strong breakout by the Japanese yen would be consistent with a declining broad trade-weighted dollar, and BCA adds this scenario “probably” would coincide with a sell-off in global risk assets.
For the broad trade-weighted dollar to resume what BCA describes as its “bear market,” cyclical currencies such as the Canadian, Australian, and New Zealand dollars would need to rise above their three-year moving averages—a milestone that “has not yet happened,” according to the research.
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