CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

Dollar index forecast: will the DXY weaken as the US election edges closer?

Following a near decade-long uptrend, the dollar index (DXY) could decline before and into the US elections in November.

A group of analysts are predicting that the US dollar index (DXY or US Dollar Basket with IG) – which measures the value of the US dollar compared to a basket of others currencies – could lose steam within the next few months. The index climbed over 40% from 2011 to its recent peak in March. Yet the currency could decline before and into the US election in November.

The dollar index could weaken into the US elections

Following a near-decade-long uptrend, the safe-haven currency could tumble going into the US elections in November. This was predicted last week by Macquarie’s managing director, Gareth Berry to CNBC, who defines his stance as ‘quite bearish on the US dollar’.

‘We do see scope for broad-based US dollar weakness into the US presidential election’, he explained, as recent polls reveal Joe Biden is currently leading over US President Donald Trump in six swing states.

A Biden presidency could negatively impact the markets, at least in the short term, with Wall Street concerned that the democrat candidate will end a range of policies that have helped increase stock prices. Therefore, investors may prefer to invest in the euro or in the yen rather than in the traditional safe-haven currency.

‘We have had episodes in the past where the dollar has weakened around political events in the US… it’s rare but happens from time to time’, said Gareth Berry.

This was notably the case during the 2011 debt ceiling crisis in the US. When Standard & Poor downgraded the credit rating of the United States for the first time, the US Dollar Basket fell quickly from above 96.4 to 96.25.

The situation could happen again in November, believes Gareth Berry. He foresees that the Japanese yen as well as the euro could serve as key alternatives to the dollar during the elections.

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Predictions sugest bearish trajectory for the dollar index even before the elections

Gareth Berry’s bearish stance is far from an isolated point of view. Bloomberg analysts are even predicting that the dollar could drop before November. They note that Deutsche Bank’s Trade-Weighted Dollar Index – another reference gauge of the currency - has fallen to test the trendline in place since 2011. ‘A break of which would be an important signal for dollar bears’, considers Bloomberg.

As the US economy appears to recover from the pandemic at a slower-than-expected pace, the euro, the yen and even the Chinese yuan could gain traction against the dollar. ‘Improving domestic economic trends in the euro area and China, as well as our rising conviction in structural dollar weakness over time, reinforce our view that the dollar is poised to weaken against these major currencies’, wrote Goldman Sachs strategist Zach Pandl last week.

At last, ‘a serious caveat to the dollar moving forward is the growing hostility of the United States towards its major counterparts’, explained John Kicklighter, chief strategist at DailyFX, earlier this month. ‘The carry over trade war with China is taking out on a new life as the White House increasingly ascribes blame for the global pandemic on the country [and] this policy uncertainty is likely to only increase as the US elections come into view’, warned the specialist.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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