- The US Dollar Index is exhibiting a softening trend, currently trading at 101.6 during the early European session on Tuesday, reflecting a 0.19% decrease on the day.
- The index’s overall outlook remains skewed towards the downside, particularly while it remains below the 100-day Exponential Moving Average (EMA).
- The critical support level to monitor is the 100.00 mark, while the initial resistance level on the upside is observed at 103.35.
The US Dollar Index (DXY), which gauges the value of the US Dollar (USD) against a basket of six major world currencies, is pulling back from its peak level attained since April 10, settling at 101.60 during the early hours of European trading on Tuesday. This movement comes amidst evolving market sentiment regarding potential trade dynamics. Initial optimism surrounding a possible tariff agreement between the United States and China had previously alleviated some concerns about an escalating trade war between the world’s two leading economies, providing support for the USD. However, recent data suggests a more cautious outlook, contributing to the current pullback.
From a technical standpoint, the bearish sentiment surrounding the DXY appears to be holding, given that the index is trading below the crucial 100-day Exponential Moving Average (EMA) on the daily chart. This positioning suggests continued downward pressure. However, the possibility of further consolidation or a temporary rebound cannot be entirely dismissed. The 14-day Relative Strength Index (RSI) is currently hovering around the midline, indicating a neutral momentum in the short term, which could lead to a period of sideways trading before a clearer direction emerges. Market participants are closely watching upcoming economic data releases, including inflation figures and employment reports, for further clues about the Federal Reserve’s future monetary policy decisions.
The primary support level for the US Dollar Index is strategically positioned at the psychological threshold of 100.00. A decisive break below this level could potentially expose the next support at 99.23, which represents the low recorded on May 7. Further downward movement could then target 98.02, the low witnessed on April 22, as the next bearish objective. These levels are crucial for traders to monitor as potential areas of price consolidation or further declines.
Conversely, on the upside, the 100-day EMA, currently situated at 103.35, is acting as an immediate resistance level for the DXY. Overcoming this barrier would be a significant bullish signal. An additional resistance point is identified at 104.31, the high from April 2. Should the index manage to sustain gains beyond this point, a rally towards 104.71, the high recorded on March 27, could be anticipated. These resistance levels represent key hurdles for the DXY to overcome in order to reverse its current bearish trend. Investors are also keeping a close watch on geopolitical developments and any shifts in global risk sentiment, which could influence the demand for the safe-haven US Dollar.
US Dollar Index (DXY) daily chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
