Investors eye COVID-19 spread, Golden Cross to gauge U.S. dollar trajectory

Reuters reports that a rally in the U.S. dollar has investors looking at a broad range of factors -- from global COVID-19 infections to yield gaps -- to determine whether the greenback will continue appreciating.

The dollar is up 4% from its lows of 2021 and is among the world's best performing currencies this year, boosted by last month's hawkish shift from the Federal Reserve, burgeoning inflation and safe-haven demand driven by COVID-19 worries.

Because of the dollar’s central role in the global financial system, its moves ripple out towards a broad range of asset classes and are closely watched by investors.

Some investors believe the dollar - a popular safe haven during uncertain times - will rise if the Delta variant of COVID-19 spreads and risk aversion grows in markets.

COVID worries have already helped the dollar notch gains against the currencies of countries where the Delta variant is proliferating, including the Australian dollar and the British pound. Those gains could fade if coronavirus concerns ebb in coming months, however.

Speculators' net short positions on the U.S. dollar fell to their lowest level since March 2020 last week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on July 16.

The dwindling bearish sentiment could mean there is less fuel for further dollar gains. At the same time, "the dollar and other currencies do tend to overshoot when they are correcting, in both directions," Schamotta said.

The Dollar Index's (.DXY) 50-day moving average is close to crossing above its 200-day moving average and forming a chart pattern known as a "Golden Cross" that is seen as a bullish signal by those who follow technical analysis.

A Golden Cross "could herald another leg higher for the greenback," said Joe Manimbo, senior market analyst at Western Union Business Solutions.