The US Dollar Index (DXY) concluded a turbulent trading week virtually unchanged, closing Friday at 96.88 (-0.03%). Despite brief intraday rallies that saw the index attempt to reclaim the 97.00 handle, the greenback faced persistent selling pressure, unable to shake off the bearish sentiment driven by shifting monetary policy expectations. The index is now hovering just above its 52-week low of 95.55, signaling that the currency’s long-standing dominance may be facing a pivotal test.

Volatility and the “Sell the Rally” Sentiment

As illustrated in the attached 5-day chart, the dollar experienced significant intraday volatility throughout the week. A sharp sell-off on February 11th saw the index dip below 96.75, likely in reaction to macro data releases. While bulls managed a recovery mid-week, pushing the index briefly back toward 97.16, these gains were quickly faded by Friday’s close. This “sell the rally” price action suggests that institutional investors are using strength to trim long dollar positions, rather than accumulating new ones. The inability to hold gains above 97.00 is a technical weakness that often precedes a retest of lower support levels.

The Macro Driver: Disinflation and Fed Policy

The primary weight on the dollar remains the Federal Reserve’s potential pivot. With recent economic data pointing toward a “soft landing”—characterized by cooling inflation (CPI) and a stabilizing labor market—treasury yields have retreated. In the foreign exchange markets, capital tends to follow yield. As expectations for Fed rate cuts solidify, the interest rate differential that has long favored the US dollar is narrowing. Consequently, the greenback is losing its allure compared to the Euro and other major currencies where central banks remain relatively more hawkish or where economic surprises are turning positive.

Implications for the Shekel and Local Investors

For the Israeli market, the DXY’s weakness presents a complex dynamic. Typically, a weaker global dollar provides a tailwind for the New Israeli Shekel (ILS), lowering the cost of imports and easing inflationary pressure domestically. However, local investors must remain attuned to the “risk-off” nature of the current market. While the dollar is down against majors, it often retains strength against emerging market currencies during periods of high equity volatility. If the global risk sentiment deteriorates further, we could see a bifurcation where the DXY falls (against the Euro) but the USD/ILS exchange rate remains stubborn due to local geopolitical risk premiums.

Outlook:
Looking ahead to next week, the technical picture for the DXY is precarious. Traders should closely monitor the 96.50 support zone. A confirmed break below this level could trigger a rapid descent toward the 52-week low of 95.55. Conversely, bulls need a sustained close above 97.20 to invalidate the current bearish trend. With key economic indicators on the horizon, the market will be keenly focused on whether the Fed validates the bond market’s dovish pricing. Until then, defensive positioning in currency exposures is recommended.