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

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.