Trade wars, uncertainty over the economic outlook, high inflation… Those crosscurrents are stoking volatility.

And it’s not just in the stock market.

Price swings are getting amplified in the largest market in the world – currencies. An index from JPMorgan tracking currency volatility recently rose near its highest level in two years.

That probably comes as no surprise. Currency traders have to react in real time to unfolding events around tariffs and trade wars.

That includes the U.S. dollar. The world’s reserve currency hasn’t been spared from the whipsaws.

But the dollar is getting stretched too far in one direction. And signs of a reversal are piling up.

Today, let’s break down the dollar chart and look for trading opportunities at hand…

Stuck in a Range

You can spot the price action in the dollar with the U.S. Dollar Index (DXY). It tracks the performance of the dollar against a basket of currencies like the euro, British pound, and Japanese yen.

DXY soared following the U.S. election back in November. That move looked like it would push DXY out of a range that’s held for nearly two years.

Take a look at the long-term chart below:

After peaking in September 2022 at “1,” DXY fell toward the 100 level.

From there, DXY carved out a large trading range shown with the shaded box. That range lasted for nearly two years.

Starting in October, DXY went on a massive run (for a currency). The rally picked up steam following the U.S. election in November.

That led DXY to break above the range at “2,” which sent DXY to its highest level in over two years.

But it didn’t last.

With tariffs and retaliatory measures coming into play, DXY quickly pulled back into the range.

Yet there are now growing signs that DXY’s pullback has gone too far. That suggests a mean-reversion opportunity could be in store…

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Signs of a Reversal

The quick drop during the first half of March has DXY extended to the downside.

That’s creating oversold conditions while DXY is trading far below a key moving average.

Take another look at the chart:

On March 11, DXY was trading nearly 4% below its 50-day moving average (MA – blue line) at the arrow.

That’s the furthest it has been below the 50-day MA since late 2022. It is one of the most oversold readings of the past five years.

Many traders use moving averages as support or resistance levels. A crossover can also indicate a change in trend.

But mean-reversion opportunities can also appear when the price gets extended too far above or below a key MA.

And take a look at the Relative Strength Index (RSI). There are two important developments to note.

Here’s the chart again:

First, the RSI fell all the way to 25 in mid-March. That’s the third most oversold level since late 2020.

At the same time, a positive RSI divergence is developing. DXY was recently testing the lows of the recent sell-off. But the RSI is making a higher low, shown with the dashed line.

Other tailwinds are lining up for the dollar.

The Fed kept interest rates at relatively high levels last week, which should attract investor capital to the U.S.

The dollar can become a safe haven during times of uncertainty as well.

Now we have chart evidence that a reversal should be underway.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict