In a February 23, 2024, Barchart article on the dollar index, I wrote:

The odds favor an inside year in the U.S. dollar index, but many factors could ignite surprises that defy the odds and send the dollar index higher or lower over the coming months. In late February 2024, the geopolitical landscape and higher for longer U.S. interest rates favor the upside, but the election could send the currency index either way later this year. 

The dollar index was at 103.95 on February 23, increasing to 105 in mid-May 2024. Even though the index has posted a marginal gain, the index that measures the U.S. currency against other world reserve foreign currency instruments has lost value over the past months. 

A higher dollar index since late February

The dollar index has edged higher since late February as U.S. inflation data has caused the Federal Reserve to keep the Fed Funds Rate higher for longer. 

The chart shows the dollar index fell to a 102.260 low on March 8 before turning higher and rallying to a 106.52 high on April 16. At the 104.43 level on May 15, the index was slightly higher than the late February level but has been trending lower since then. While the short-term trend is lower, the medium-term path of least resistance in 2024 remains higher, with the dollar index making higher lows and higher highs. 

Markets screaming the dollar is falling, and the index is a mirage

The dollar is the world’s leading reserve currency, but it is not the oldest exchange instrument. That position belongs to gold, the precious metal that has been a store of value and a sign of wealth for thousands of years. Central banks, governments, monetary authorities, and supranational institutions own gold as an integral part of foreign currency reserves, validating gold’s significant role in the worldwide financial system.

Gold’s ascent over the past quarter of a century comes at the expense of the U.S. dollar and all fiat currencies. 

The long-term chart highlights gold’s rally from $252.50 in 1999 to the latest $2,429 per ounce high in April 2024. Gold’s ascent in U.S. dollar terms has been impressive, but the precious metal that is a hybrid commodity and financial instrument has appreciated in every fiat currency. 

Gold is money, and that asset is telling us fiat currencies have lost significant value over the past two and one-half decades. Meanwhile, gold was trading at under $300 per ounce at the turn of this century, and virtually all other commodity and asset prices were lower in early 2000. The dollar index was at the 101.40 level in early 2020. The price action in commodities over the past twenty-four-plus years indicates the world reserve currency’s loss of purchasing power over the years. While the dollar index is slightly higher than the 2000 opening level, commodity prices have experienced significant rallies, indicating the overall weakness in the U.S. dollar and other fiat currencies. 

Factors that can push the index higher

The factors that could push the dollar index higher are:

• While the dollar has lost purchasing power, it is still the world’s most liquid foreign exchange instrument. Central banks and governments own dollars for cross-border transactions and trade. 
• Geopolitical turmoil tends to cause the dollar index to rise as it serves as a safe haven. 
• Economic turmoil also causes the dollar index to rise for the same reason. 
• The rise in U.S. interest rates, which will likely keep rates higher for longer, is bullish for the U.S. dollar index as interest rate differentials are a critical factor in determining the path of least resistance of one currency’s value versus another’s.

While the dollar index may be a mirage regarding purchasing power, it has the potential to appreciate against other world fiat currencies. 

Issues that could weigh on the dollar index

The factors that could push the dollar index lower are:

• The trend towards de-dollarization is bearish for the dollar. After Russia invaded Ukraine, sanctions on Russia have caused Russian allies, including China, to turn to other foreign exchange instruments for cross-border trade. De-dollarization is bearish for the dollar and could cause other reserve currencies to appreciate. 
• Central banks, led by China and Russia, have been buying gold to add to reserves. 
• The increasing potential of a BRICS currency with gold backing could weigh on the dollar and the dollar index. 
• The rise of China as an economic leader could forge growing economic relations with other countries, further decreasing the dollar’s significance in the worldwide financial system. 
• Domestic political turmoil surrounding a highly contentious U.S. November election that could lead to more civil insurrection is bearish for the dollar’s value as a stand-alone currency and in the dollar index.
• Fed rate cuts over the coming months could cause the dollar index to fall as interest rate differentials may favor other dollar index components. 

Many factors could push the dollar index lower over the coming months and years.

UUP and UDN track the dollar index higher and lower

The dollar index could experience elevated price volatility in 2024 and beyond due to bullish and bearish factors. Volatility creates trading opportunities. The most direct route for a risk position in the dollar index is through the ICE dollar index futures. 

The Invesco DB U.S. Dollar Index Bullish Fund (UUP) and its bearish counterpart (UDN) are unleveraged ETF products that track the U.S. dollar index. 

The most recent rally in the dollar index took it 5.86% higher from 100.62 on December 28, 2023, to 106.52 on April 16, 2024. 

Over the same period, UUP rose 7.66% from $26.91 to $28.97 per share. At $28.53, UUP had over $464.64 million in assets under management. UUP trades an average of over 777,000 shares daily and charges a 0.77% management fee. 

The dollar index dropped 2.03% from 106.520 on April 16 to 104.360 on May 15. 

Over the same period, UDN rose 2.49% from $17.65 to $18.09 per share. At $18.08, UDN had over $58.41 million in assets under management. UDN trades an average of over 29,000 shares daily and charges a 0.77% management fee.

While the dollar index trades around the clock, UUP and UDN only trade during stock market hours. The ETFs miss highs or lows when the stock market is not operating. 

The two significant takeaways are that the dollar has been losing substantial value over the past years even when the dollar index is increasing. Moreover, we could be entering a period where the dollar index could become volatile, making it more attractive for trading. UUP and UDN are valuable products for market participants looking for dollar index exposure without venturing into the futures arena.