Line chart tracks dollar index performance in recent years.
Y-axis: DXY Index level; x-axis: 2014 – 2021
Dollar Index level shows considerable volatility beginning just above 80 in January 2014 and rising over 94 at the end of Q3 2021.
In mid-2014 the index rose sharply from near 80 to near 100 by May of 2015. From then until late 2016 the index fluctuates between the low and high 90s, rising to a high above 100 in early 2017, shortly after the U.S. presidential election. From that high the index drops to a recent low in the high 80s, eventually rising above 99 by February 2020. By the second week in March the index then dipped to just under 95, followed by a rise over 102 shortly afterward, then falling again to near 92 in late November, settling near that level at the end of Q2 2021. By the end of Q3 2021 it stood at 94.2.
Main drivers of the dollar index in recent years include:
- Monetary policy divergence—Fed signals rate rises while ECB moves to begin QE (late 2014)
- “Fed pause” (December 2015 – December 2016)
- U.S. presidential election (November 2016)
- Market negative on pace of future Fed rate increases (late 2017)
- Twin deficit fears outweigh rate differentials (early 2018)
- 2018 dollar rise on firm growth versus Europe and Japan, steady Fed rate increases (mid-2018)
- “Dovish pivot” from Fed caps DXY strength (mid-2019)
- Dollar squeezes higher driven by yield-seeking and safe-haven flows (Q4 2019)
- Extreme volatility as dollar weakness is quickly reversed by a dollar surge driven by global liquidity squeeze (Q1 2020)
- Dollar extends weakness due to accommodative Fed policy and as the equity rally undercuts perceived “safe-haven” appeal. (Q2 2020)
- U.S. presidential election (November 2020)
- Dollar bounce driven by strong U.S. growth and rising inflation expectations, (Q1 2021).
Sources: Bloomberg and Wells Fargo Investment Institute. Daily data from January 1, 2014 to September 30, 2021. The DXY Index measures the value of the U.S. dollar relative to major developed market currencies, notably the euro, the Japanese yen, and the British pound. Fed = Federal Reserve. ECB = European Central Bank. QE = quantitative easing. DXY = U.S. Dollar Index. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
- The dollar may remain relatively well supported into year-end. But as U.S. growth slows a little to converge with the eurozone, we see a somewhat lower dollar trading range for 2022.
- As global growth becomes less U.S.-centric, a recovery in trade and an increase in vaccinations should allow emerging market currencies to benefit from the stable-to-weaker dollar that we anticipate.