Dollar’s Recent ‘Golden Cross’ Spells Trouble for Stock Traders

The U.S. Dollar Extends Its Winning Streak for the 10th Week in a Row, the Longest Since 2014

In a significant development, the U.S. dollar has achieved its first “golden cross” since July 2021, raising the possibility of further upward momentum and potential challenges for the stock market.

As we approach the end of the week, the 50-day moving average of the ICE U.S. Dollar Index (DXY), a key measure of the dollar’s strength against a basket of major currencies, with a strong emphasis on the euro, stands at 103.15. Notably, this surpasses the 200-day moving average, which registers at 103.11.

The index itself concluded the week at 105.56, reaching its highest level since March 10, 2023, a day that witnessed the collapse of Silicon Valley Bank, triggering a brief surge in safe-haven assets like the dollar. Over the course of the week, it edged up by 0.2%, marking its 10th consecutive weekly gain, a streak not seen since the 12-week run ending in October 2014.

The “golden cross” formation materialized when the 50-day moving average closed above the 200-day moving average, a widely recognized signal among technical analysts that often implies an emerging trend in a particular direction.

Conversely, a “death cross” occurs when the 50-day moving average crosses below the 200-day moving average. In the case of the U.S. dollar, a “death cross” occurred on January 10. Subsequently, the dollar trended downward for the following six months, ultimately hitting its lowest point in 2023 on July 14. Since then, it has been on a sustained uptrend, a trajectory that some currency experts believe has the potential to continue, especially after the Federal Reserve revised its interest rate forecasts to remain above 5% through 2024.

Based on analysis by Dow Jones Market Data, following a golden cross, the dollar typically continues to rise during the subsequent three months, posting an average gain of 1.9% and trading higher approximately 79.2% of the time. Performance becomes more mixed over a one-year horizon, with the dollar trading higher 58.3% of the time and averaging a gain of 1.5%.

Drawing from a previous golden cross on July 29, 2021, the dollar index surged by approximately 25%, advancing from around 91 to nearly 115 in late September 2022, when it reached its highest level in two decades, according to FactSet data.

However, some analysts have issued caution about the dollar’s ascent, particularly in conjunction with rising Treasury yields, which could pose additional challenges for the stock market. On Thursday, the S&P 500 experienced a drop of more than 1.6%, marking its most substantial single-day decline since March 22, as reported by Dow Jones Market Data.

Jeffrey deGraaf, a technical strategist at Renaissance Macro Research, remarked in a note to clients, “A new cycle high in yields and a golden cross in the dollar are strong headwinds for the market.”