US Dollar Drops to a Three-Year Low, Greenback Could Dip 10% Lower, Fed Still Not Ready to Taper QE

America’s currency has been flirting with lows again, as the U.S. Dollar Index (DXY) dropped to a low of 89 on Tuesday and the following Thursday. This is the third time since April 2018, the DXY has been this weak, and some analysts think the currency could drop even lower.

US Dollar ‘Is a Bit Extended,’ RSI Levels Indicate ‘Oversold’ Territory

Analysts and economists have been concerned about the U.S. dollar during the last year, after Covid-19 guidelines shook the global economy and wreaked havoc on the supply chain. Following more than 12 month’s worth of coronavirus mandates and business shutdowns, the American economy is still having a very hard time trying to recover.

Market Insider Fellow, Ben Winck, recently explained that analysts are puzzled by the U.S. economy “stumbling,” as “experts badly misjudge the labor market.” Furthermore, the U.S. dollar has been spiraling downward for two months, losing 3.7% since the end of March.

On Tuesday, the U.S. Dollar Index (DXY) slid to 89, a data point the USD has not tapped in three years since April 2018. It’s the weakest level the DXY has seen since February and it also quickly hit 89 in December 2020 as well. The DXY chart also shows the dollar has tapped 89 once again, two days later on Thursday morning (EST).

Back in April 2018, when the DXY dropped to 89, not too long after, the greenback skyrocketed to new heights. However, analysts have predicted that this time around, the USD could further slide another 10% down from 89. Rich Dvorak, an analyst from dailyfx.com further explains that the greenback looks “extended” and “oversold.”

“The broader U.S. dollar is looking a bit extended here as the relative strength index flirts with ‘oversold’ territory,” Dvorak wrote on Tuesday when the DXY hit 89. “Also, there appears to be two glaring technical support levels that U.S. dollar bulls might look to defend. First and foremost is the 89. 70-price level on the DXY Index, which is underpinned by the 25 February swing low,” Dvorak added. The market strategist from dailyfx.com continued:

The bottom Bollinger Band might help stem U.S. dollar selling pressure as well. Invalidating technical support provided by the 89. 70-price level, however, would likely open the door for U.S. dollar bears to target the 06 January swing low.

US Treasury Bonds Remain Stagnant, UK Bonds See Percentage Increases by Tapering QE Policy

The greenback’s negative weight has also pressed bond yields into a corner, as Dvorak and a number of market strategists have noticed this trend. The U.S. dollar’s lack of strength is blamed on “softer Treasury yields due to less fear of Fed tapering,” Dvorak further noted.

The finance publication Barron’s explains that the dollar is “near a key level” at 89 and 10-year Treasury notes have dropped to “1.65% from 1.75% on March 31.” But in Europe and the UK, recovery has been slightly better, as UK 10-years bonds have seen a percentage increase.

While speaking with Barron’s, the founder of Sevens Report Research, Tom Essaye highlighted how the Bank of England (BoE) has already curbed quantitative easing (QE) policy.

”As the EU has recovered and vaccination rates have risen… and the fact that the Bank of England already tapered QE [quantitative easing] (and now there’s growing expectations the ECB will taper QE this summer), that has pushed the pound and euro higher vs. the dollar as the Fed remains adamant it won’t even start to think about tapering,” Essaye stressed to the financial columnist Jacob Sonenshine on Wednesday.

Fed Chair Speaks on Curbing the Central Bank’s Asset Purchases: ‘We’ll Let the Public Know When It Is Time to Have That Conversation’

This hasn’t been the case with Federal Reserve officials until recently, as central bankers in the U.S. are now just starting to talk about tapering QE efforts. On Wednesday, the Fed released a transcript of the recent April 27-28 policy meeting, and a “number” of members of the Fed started to discuss reducing the central bank’s economic support.

Although a great majority of the central bank’s policymakers stressed that the Fed needs to witness “substantial” economic progress in order to ease up on QE. Fed officials believe the $120 billion in monthly bond purchases has cushioned the American economy and sped up recovery so far.

Furthermore, Fed Chair Jerome Powell was faced with the pressing question of when the QE tapering would begin at a monetary policy news conference.

“No, it is not time yet. We have said we’ll let the public know when it is time to have that conversation, and we’ve said we’d do that well in advance of any actual decision to taper our asset purchases, and we will do so,” Powell told reporters at the C-Span conference that followed the April policy meeting.

Analysts, economists, and financial pundits believe the weak U.S. dollar, rising inflation, and poor bond yields are mainly due to the Fed’s massive QE policy to battle the country’s Covid-19 economy.

Although, not everyone is bearish about the U.S. dollar and some believe a recovery is in the midst. The economics editor for Bloomberg, Peter Coy, published an article this week about the Fed’s April policy meeting as well. The economist noted that “Federal Reserve officials were optimistic about the economy.”

Coy’s editorial further stressed that the “U.S. dollar is not crashing, no matter what the bears say.” The Bloomberg economics editor seems to believe that the stimulus and businesses opening back up has “paved the way for a rebound.” Coy says that this has caused “a number” of them to talk about “dialing back some support for the economy.”

Despite a few media pundits saying that Fed members have begun to “tiptoe toward a conversation” of tapering back QE, the central bank has stressed it won’t do so right now. Greenback bears continue to be right about the Fed’s lust for monetary easing, and the U.S. dollar cannot adjust fast enough against rising inflation. Purchasing power in the U.S. has decreased rapidly and looking at the current state of the U.S. Dollar Index (DXY) chart, the greenback’s future reliability looks awfully dismal. Data and numbers clearly show Coy’s USD optimism is unfounded.

On Thursday morning, the greenback’s DXY chart shows the dollar has slipped under 90 again and back to 89.887.