Three Reasons to Expect that the Dollar Rally could Gain Momentum

Retracement in US equities gains traction, but it appears to be proceeding in an orderly manner: the S&P 500 has been declining for six consecutive sessions, but it is not losing more than 1% per day. The bearish momentum increased on Thursday, with losses reaching nearly 0.8%. Since the beginning of August, the index has erased approximately 5%, and it seems that sellers have set a goal to test the 100-day moving average, which resides near 4300 points. However, considering the price channels formed on the daily timeframe, the bearish target could be an area that extends even slightly lower, around 4250 points:The dollar index hovers near its opening level on Friday, but on the daily chart, it seems that the price is pressing against the upper bound of the medium-term bearish channel, a kind of worrisome sign for greenback bears:In case of a successful bullish breakout, there is a risk of emergence of a medium-term bullish momentum on idea that the bearish trend could be over. There are several fundamentals which could make that idea plausible.Firstly, there is a risk that the setback in China activity observed recently could spill over to the other economies. Any slowdown in China's economy implies weakening demand on Chinese goods and services which is just another name for slowing global demand. In addition to weak data on foreign trade, industrial production, retail sales, and capital investments, significant risks have also emerged in China's financial market. These risks are associated with the potential bankruptcy of a major developer, prompting investors to significantly reduce their holdings of Chinese stocks. The sale of Chinese assets is being felt in the yuan exchange rate; USDCNY has already broken the yearly high this week and encountered implicit currency intervention from the People's Bank of China (PBOC). The PBOC set the reference rate for USDCNY today with a significant deviation from yesterday's closing level (7.20 compared to 7.30).Secondly, both nominal and real long-term interest rates in the United States are rising. It is clear that investors are preparing for the possibility that the period of high inflation in the US will be prolonged. In other words, the US may achieve a soft landing for its economy, and the likelihood of the Federal Reserve lowering rates in response to a crisis next year is diminishing sharply.Thirdly, the high yield on US bonds is forcing investors to demand higher expected returns in the stock market as well. This is leading to a substantial correction in the equity market and, consequently, increased demand for money. High interest rates and cheaper stocks make them relatively attractive to foreign investors, further fueling demand for the dollar.