- US Dollar Index may encounter significant resistance at 98.54 50-day EMA
- Short-term price momentum is faltering as DXY trades below the nine-day EMA.
- Immediate support seems to rest at the lower boundary of 97.70 within the rising channel.
The US Dollar Index (DXY), which gauges the dollar’s value against six major currencies, has continued to decline for a second consecutive day, hovering around 98.10 early Thursday in Europe. Traders are anticipating the upcoming US unemployment claims data expected later in the North American session.
Daily chart analysis indicates that the US dollar index is operating within a rising channel, hinting at an overall bullish sentiment. However, the 14-day relative strength index (RSI) has dipped below the 50 mark, which diminishes this bullish outlook. Additionally, short-term price momentum appears to be weakening as the DXY drops beneath the nine-day moving average.
On the bright side, the USD index is eyeing a key resistance level at the 50-day EMA of 98.54 and aims for 98.62. Breaking above these points may enhance both short- and medium-term price momentum and bolster the DXY, possibly nearing a three-month peak at 100.26 reached on August 1, followed by resistance around 100.40.
Currently, DXY is testing immediate support at the psychological threshold of 98.00, with the lower limit of the upward channel situated near 97.70. Should it breach this channel, a bearish trend could emerge, putting the US dollar index under pressure to revisit lows not seen in three years, recorded at $96.38 on July 1.
US Dollar Index: Daily Chart
US Dollar FAQ
The US dollar (USD) serves as the official currency of the United States and is widely circulated in various other nations alongside local currencies. Data from 2022 reveals that it’s the most commonly traded currency globally, representing over 88% of forex transactions, equivalent to about $6.6 trillion a day. Post-World War II, the US dollar replaced the British pound as the global reserve currency. While it was historically backed by gold, this changed with the Bretton Woods Agreement in 1971, resulting in the end of the gold standard.
The primary factor influencing the value of the US dollar is monetary policy as dictated by the Federal Reserve. The Fed focuses on two main objectives: maintaining price stability (keeping inflation in check) and promoting full employment. Interest rate adjustments are the key tools for achieving these goals. When inflation spikes above the Fed’s 2% target, increases in interest rates are typically employed to bolster the dollar’s value. Conversely, if inflation dips below 2% or if unemployment rates rise excessively, the Fed might lower interest rates, negatively impacting the dollar.
In extreme situations, the Federal Reserve might resort to printing more dollars and implementing quantitative easing (QE). This approach significantly boosts the credit flow within the financial system, especially in cases where lending halts due to fears of defaults. If simply lowering interest rates proves insufficient, QE serves as a last resort. This tactic was notably used during the 2008 financial crisis, where the Fed printed dollars to purchase US government bonds from financial institutions. Typically, QE leads to a depreciation of the US dollar.
Quantitative tightening (QT) represents the opposite of QE, wherein the Federal Reserve ceases bond purchases from financial institutions and refrains from reinvesting in new bonds as older ones mature. This generally supports a stronger US dollar.
