Has the Dollar Index Bottomed?

I asked if the Dollar Index was going to plunge in a March 7, 2025, Barchart article. The index was at the 103.67 level on March 7 and has moved lower, with the most recent low below the 98 level. The article highlighted the dollar index’s bullish trend since 2008 and the bearish trend since the 1980s. The most recent decline validates the very long-term trend, but the dollar’s value over the coming months will result from economic and geopolitical factors. The dollar index breaks a critical technical support levelThe monthly chart highlights that technical support for the U.S. Dollar Index was at the July 2023 99.58 low. The chart shows the dollar index fell below the July 2023 low in April 2025, falling to a 97.92 low, the lowest level since March 2022. The index recovered from the low in early May to just above the 100 level. U.S. tariffs have weighed on the dollar indexU.S. President Trump declared April 2, 2025, as “Liberation Day” and rolled out unprecedented tariffs on worldwide U.S. trading partners to level the playing field. The President announced widespread tariffs after the markets closed on April 2, and the dollar index, along with many other markets, sharply declined. The daily chart highlights the dollar index’s decline on April 3, leading to the 97.92 low on April 21. Since then, some optimism that the U.S. will negotiate trade agreements that soft the tariff’s blow has caused the index to recover and make higher lows and higher highs. However, it remained near the 100 level on May 9.The bearish case for the dollar indexThe bearish case for the dollar index includes: The trend since the January 2025 high at the 100 level has been bearish and is always a trader or investor’s best friend. The index broke below a critical technical support level, which is bearish. Tariffs create trade barriers that distort prices. The potential for rising inflation and increasing recessionary pressures is weighing on the dollar index. The unprecedented U.S. tariffs have caused governments worldwide to seek alternatives to the U.S. dollar. Since the euro is the second most liquid reserve currency and accounts for more than half the dollar index’s value, a strengthening euro currency is bearish for the dollar index. U.S. inflation has been declining, and pressure on U.S. markets could lead the Federal Reserve to reduce the short-term Fed Funds Rate. Lower U.S. interest rates tend to weigh on the dollar index’s value. The ascent of gold to four consecutive new record highs over the first four months of 2025 is a significant commentary on the value of the U.S. dollar and all fiat currencies. U.S. debt at over $36.8 trillion erodes the U.S. currency’s value. The dollar index is in a bearish trend in May 2025, with many factors contributing to the currency’s weakness. Meanwhile, critical technical support is significantly below the current level of around 100. The quarterly chart illustrates the dollar index’s next technical support at the Q1 2021 89.20 low. Below there, the next downside target could be the Q1 2008 70.69 bottom. The bullish case for the dollar indexThe bullish case for the dollar index includes: While the quarterly chart shows the technical support levels, the dollar index has remained in a bullish trend since the 2008 low, making higher lows and higher highs. The bullish trend will remain intact if the index remains above the Q1 2021 89.20 low. The dollar index could quickly recover if the Trump administration negotiates favorable trade agreements with worldwide partners, including China. The dollar has been the world’s reserve currency for around a century. While past reserve currency dominance has lasted around a century, the U.S. remains the world’s leading economy and a top military power, supporting the dollar’s role in the global financial system. The U.S. is the leading consumer market and the home to the top capital-creating markets. While the dollar is under pressure, there are plenty of reasons for the U.S. currency to recover and retain its dominant role.UUP and UDN are bullish and bearish dollar index ETF productsThe most direct route for a risk position in the dollar index is the futures listed on the Intercontinental Exchange. The Invesco DB U.S. Dollar Index Bullish Fund (UUP) moves higher and lower with the dollar index. In contrast, the Invesco DB U.S. Dollar Index Bearish -1X Fund (UDN) moves higher when the dollar index declines and lower when it rallies.At $27.61 per share, UUP had over $282.8 million in assets under management. UUP trades over 1.133 million shares daily and charges a 0.77% management fee.The dollar index rose 10% from 100.16 in September 2024 to 110.17 in January 2025 and declined 11.12% to a low of 97.92 in April 2025. Over the same period, the UUP ETF moved 9.76% higher from $27.96 to $30.69 per share and declined 12.06%, falling to a low of $26.99 per share in April 2025. Meanwhile, the UDN ETF moved 13.4% lower from $19.04 to $16.49 per share when the dollar index rallied and increased 12.7% to $18.59 per share when the dollar index declined. At $18.24 per share, UDN had over $135.38 million in assets under management. UDN trades an average of over 426,800 shares daily and charges a 0.77% management fee. The dollar index has been volatile in 2025, and U.S. trade policies could keep the price variance high over the coming months. UUP and UDN are liquid ETF products that do an excellent job of tracking the dollar index on the upside and the downside. Time will tell if the technical downside break leads to a test of the 90 level, which is the next support, or if the trade environment improves and the index returns toward the early 2025 high. At this point, the trend favors the downside. On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.