It largely went unnoticed on Tuesday thanks to plenty of noise from other facets of the market, but the U.S. dollar was up-ended, sinking to new multi-month lows and setting the stage for more downside. The price of gold and oil haven't fully reflected the scope of the dollar's dip yet, but if the chart of the greenback does what it looks like it's going to do, this could change the complexion of the broad market for a while.
It shouldn't come as a complete surprise. The U.S. Dollar Index has been trending lower since January, and broke under a key floor in May. In early June the dollar hinted at a bullish turnaround, but that effort petered out rather quickly. Thanks to today's setback though, the U.S. Dollar Index has suffered some technical damage it may not be able to shrug off. Specifically, the index closed below the early Jun low of 96.50.
To fully appreciate the downside potential here -- now that the bearish ball is rolling -- we have to zoom out to the weekly chart of the dollar. It's in this timeframe we can see the scope of the recent selling, and that the pause for the prior five weeks was just a consolidation phase... to give the sellers a chance to catch up with one another before the regrouped for a second wave of selling.
To that end, don't be entirely surprised if the bulls push back a little from here. Today's steep selloff is uncharacteristic for the greenback, and that usually invites bargain-hunters. Just don't count on any bullish recovery effort going very far, as the last several haven't.
If the dollar does bounce and then falls back under 96.50, there's not going to be any quick recovery from that. The downside target in that event is 93.1, where the U.S. Dollar Index saw key lows over the course of 2015 and 2016.
This isn't a bad thing, though some headlines might paint such a picture. A weaker dollar means gold prices move higher, as does oil. The energy sector could use some help restoring profitability. A falling dollar also makes U.S-made goods more affordable overseas, increasing exports, and thereby increasing the profitability of U.S. companies that sell to foreign markets.
The trick is the pace of the dollar's pullback. If it slumps too fast, inflation could jump and commodities markets could become too turbulent to trust. As it stands right now though, the U.S. dollar's selloff is unfurling at an even pace that won't be too disruptive for our own good.
That being said, should the U.S. Dollar Index break under that 93.1 area, that's when things could start to get uncomfortable again. Though the greenback is usually under that mark, a trip back to that level now would require a lot of economic adjustments that most haven't been forced to make in a while.