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U.S. Dollar Index Futures Drop to New October Lows

Key Points
  • Dollar Plays Defense but Slips Below Key 93.00 Support

As another massive stimulus package approached deadlines Tuesday afternoon, U.S. dollar index futures dipped to 1-month lows below 93.00. The outlook for a prolonged period of low interest rates coupled with possibilities for inflation and uncertainties on the U.S. political scene have pressured the greenback as impacts from the pandemic have evolved. In trading early Wednesday morning, selling continued pushing the December contract near 92.75 and setting up a fourth consecutive down session.

In the early days of global shutdowns, the dollar index spiked higher and spent much of the spring near 100. But in the current risk environment, the dollar has lost some appeal as it carries a near-zero yield amid outlooks for re-inflation.

In a fairly substantial and rapid move for a major currency index, dollar index futures have dropped about 7% since April.

Breaking down the U.S. dollar index’s weighting structure may explain the pullback. The bulk of the index (~57%) is weighted to euro, against which the greenback has slid 9% over the last six months. Lighter-weighted index components are strengthening versus the dollar as well, with the Swedish krona up over 14% and the Swiss franc up 7% since mid-April. The Japanese yen has been the weakest performer in the basket over this period, but it has still gained 2% versus the dollar.

Traders looking for a diversified basket of leveraged currency exposure may look to the Intercontinental Exchange’s U.S. Dollar Index Futures. These quarterly contracts, based on the U.S. Dollar Index, started trading November 20th, 1985.

While other broad currency indexes may exist for over-the-counter risk management, the ICE’s Dollar Index Futures provide somewhat diverse currency exposure in a standardized, liquid, regulated market, with roughly $2 billion in notional value traded daily in October.

The dollar index futures are based on an index created by the U.S. Federal Reserve in 1973. The composition of the index transitioned in January 1999 when the Euro launched, replacing Belgium’s Franc, the German Deutsche Mark, French Franc, Italian Lira, and the Netherlands’ Dutch Guilder.  Other than the one-time transition to the Euro, the index is generally not rebalanced.

U.S. Dollar Index Weightings

Unlike most index futures contracts, the U.S. Dollar Index futures settle with the delivery of currencies at expiration. Because of this characteristic, expiring positions at most firms would either be offset or rolled to the next active contract prior to expiration.   

The futures contracts offer fairly high leverage, requiring about 2% initial margin for overnight positions. The December 2020 contract recently traded at 92.70, and each full point carries a multiplier of $1,000. The index’s lifetime extremes include a record high of 164.72 in February 1985, while in March of 2008 it plummeted to 70.698.

Technicals December 2020 U.S. Dollar Index Futures

The market’s short-term trend has become negative with the December contract trading below all moving averages and the RSI at sub-40 levels. The second support level was nearly tested early Tuesday but quickly bounced back above the 93 level, only to fall below 92.70 Wednesday morning.    

Resistance 2      94.046

Resistance 1       93.738

Pivot                    93.466

Support 1           93.158

Support 2           92.886

SMA 10 Day      93.438            

SMA 20 Day      93.751

SMA 50 Day      93.313

RSI                      39

Contract Specifications

Trading Calendar

Mortgage Applications                     10/21/2020 7:00 a.m. ET

Initial Jobless Claims                       10/22/2020 8:30 a.m. ET

Leading Index                                    10/22/2020 10:00 a.m. ET

Consumer Confidence                      10/27/2020 10:00 a.m. ET

 

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