The US dollar influences the assets you trade in ways that often go unnoticed in technical chart analysis. The American currency is not just another asset. It is the benchmark that organizes global liquidity, and its strength or weakness reverberates in virtually all markets simultaneously.
Understanding this dynamic is not optional for anyone who wants to trade within a context. It's the difference between reading a chart in isolation and reading it with awareness of the surrounding macro environment.
Why does the US dollar have this power over the markets?
The US dollar accounts for approximately 88% of all transactions in the global foreign exchange market, according to a survey by the Bank for International Settlements (BIS). Furthermore, about 60% of central bank reserves worldwide are denominated in dollars. These two figures alone explain why no other currency exerts a comparable influence on the international financial system.
Furthermore, most commodity contracts worldwide, such as oil, gold, natural gas, soybeans, and iron ore, are priced in dollars. This creates a structural relationship between the behavior of the US currency and the prices of these raw materials across the globe, regardless of where the product is produced or consumed.
When the dollar appreciates, other assets need to respond. When it weakens, the movement is distributed across risk markets. This dynamic is not a coincidence. It is the natural functioning of a financial system organized around a single global reserve currency.
What is DXY and why should every trader follow it?
The DXY, or US Dollar Index, is an indicator that measures the strength of the US dollar against a basket of six currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. Created in 1973 by the Intercontinental Exchange (ICE), the index functions as a thermometer of the relative health of the US currency.
When the DXY rises, the dollar is appreciating against the world's major currencies. Consequently, money flows from other assets into the dollar. Stocks, commodities, emerging market currencies, and cryptocurrencies tend to experience selling pressure in this scenario. On the other hand, when the DXY falls, the dollar weakens and liquidity is redistributed to higher-risk assets, especially benefiting emerging markets with a strong export portfolio of commodities.
For forex traders, the DXY is the other half of any pair involving the dollar. For cryptocurrency or commodity traders, the index reveals whether the global environment favors risk-taking or a search for safety. No macroeconomic analysis is complete without this reading.
How a strong dollar impacts commodities.
The relationship between the dollar and commodities is widely documented and tends to be inverse. When the dollar strengthens, commodities priced in that currency become more expensive for those buying in other currencies, which reduces global demand and puts downward pressure on prices.
Oil, gold, soybeans, corn, and iron ore consistently follow this logic over time. However, each commodity also has its own fundamentals, such as supply, demand, weather, and geopolitics, which can override or mitigate this correlation at certain times. Therefore, the behavior of the dollar provides context, but it does not replace the specific analysis of each asset.
Gold, in particular, maintains a particularly significant correlation with the dollar. Historically, periods of a strong dollar put pressure on gold, while a weak dollar usually coincides with an appreciation of the metal. However, in times of severe crisis or intense geopolitical instability, both can rise simultaneously, as they both function as safe-haven assets and attract investor flows for different reasons.
How the dollar influences cryptocurrencies.
The relationship between the US dollar and cryptocurrencies is more recent than that with traditional commodities, but equally relevant for those who trade these assets. Bitcoin and the main cryptocurrencies are quoted in dollars on international markets. Therefore, the strength or weakness of the dollar directly impacts the price of these assets in reais or any other local currency.
In Brazil, for example, when the dollar appreciates against the real, the price of Bitcoin in reais tends to rise, even if the asset remains stable in dollars. This exchange rate effect amplifies movements and can confuse traders who do not monitor the dollar exchange rate in parallel with the analysis of the asset.
Furthermore, the macroeconomic environment generated by the dollar's behavior affects the global appetite for risk assets. When the DXY rises abruptly, it signals a flight to safety, and cryptocurrencies, classified as high-risk assets, usually suffer a drop in demand. In the period from 2020 to 2021, when the Federal Reserve expanded its balance sheet from approximately US$4 trillion to almost US$9 trillion and the DXY weakened, Bitcoin, Ethereum, and US stocks rose significantly, reflecting the flow of liquidity into risk assets.
How the dollar affects emerging markets
Emerging countries are especially sensitive to the behavior of the US dollar. When the dollar strengthens, international capital tends to leave these markets in search of the safety and higher returns offered by dollar-denominated assets. This outflow puts pressure on local currencies, makes imports more expensive, raises inflation, and forces central banks to raise interest rates to defend the currency, which reduces economic growth.
In the case of Brazil, this dynamic is particularly visible. A significant portion of Brazilian exports consists of commodities priced in dollars. Thus, when the dollar weakens and commodity prices rise, Brazil benefits doubly: it exports at higher prices and attracts foreign capital flows. In this sense, the DXY functions as an indirect thermometer of the performance of Brazilian assets in the medium term.
Therefore, there is a well-documented negative correlation between the DXY and emerging market currencies. In times of crisis, such as financial panics or serious geopolitical events, the dollar tends to strengthen rapidly while emerging market currencies lose value at an accelerated rate.
How the Federal Reserve amplifies the influence of the dollar.
The American central bank, the Federal Reserve (Fed), plays a central role in the dynamics of the dollar and, consequently, of all assets that revolve around this currency. When the Fed raises interest rates, dollar-denominated assets offer more attractive returns, which strengthens the dollar and removes liquidity from risky assets around the world. When it lowers interest rates or injects liquidity through asset purchase programs, the dollar tends to weaken and the appetite for risk increases.
Therefore, the American economic calendar and Fed decisions are events with a direct impact on all assets that any trader operates, regardless of which market they prefer. Meetings of the Federal Open Market Committee (FOMC), US inflation data (CPI), employment reports (payroll), and speeches by Fed directors move markets globally and immediately.
However, recognizing these triggers does not eliminate risk. On days with significant US economic data, volatility increases unpredictably, and many traders prefer to reduce their exposure or not trade at these times, which is an equally legitimate technical decision.
The dollar as a compass for the market environment.
The behavior of the US dollar acts as a compass for understanding the global macroeconomic environment. A continuously rising DXY suggests a risk-averse environment, the dollar as a safe haven, and pressure on risk assets. A consistently falling DXY signals an appetite for risk, flows into emerging markets and commodities, and more favorable conditions for assets such as gold and cryptocurrencies.
Incorporating this reading into the analysis does not mean abandoning the technical analysis of the specific asset. It means adding a layer of context that explains why certain movements occur, why the technical setup failed at a particular moment, or why seemingly different assets are moving in the same direction at the same time.
Ultimately, the dollar doesn't predict the future of any asset. However, those who ignore it operate with less information than the market offers. And in trading, context is an essential part of the analysis.
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