- The US Dollar Index recovers some lost ground to near 103.50 in Thursday’s early European session.
- The DXY keeps the negative outlook below the 100-day EMA with a bearish RSI indicator.
- The first downside target to watch is 103.20; the immediate upside barrier is seen at 104.10.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades in positive territory near 103.50 during the early European session on Thursday.
However, the upside of the DXY might be limited as the Federal Reserve (Fed) indicated interest rate cuts were likely later this year. Additionally, the Fed officials lowered its forecast for economic growth and revised both its inflation projection and unemployment estimates higher.
According to the daily chart, the bearish outlook of the DXY remains intact, with the index holding below the key 100-day Exponential Moving Average (EMA). Further downside looks favorable as the 14-day Relative Strength Index (RSI), which stands below the midline near 31.75.
The initial support level for the USD index is located at 103.20, the low of March 18. Sustained trading below the mentioned level could expose 101.88, the lower limit of the Bollinger Band. A breach of this level could see a drop to 100.53, the low of August 28, 2024.
On the other hand, the high of March 14 at 104.10 acts as an immediate resistance level for the DXY. The additional upside filter to watch is 105.45, the high of November 6, 2024. The key upside barrier is seen at 106.00, representing the 100-day EMA and the psychological level.
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.
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