US Dollar Index Price Forecast: Key support level emerges near 103.00, oversold RSI condition eyed
- The US Dollar Index rebounds to near 103.55 in Wednesday’s early European session, adding 0.13% on the day.
- The negative outlook of the index remains in play, but further consolidation cannot be ruled out amid the oversold RSI condition.
- The crucial support level to watch is the 103.10-103.00 region; the immediate resistance level is seen at 104.40.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, recovers to near 103.55 after bouncing off four-month lows around 103.20. However, the upside for the index might be limited amid concerns mounted over a US slowdown and the impact of tariffs on global economic growth.
According to the daily chart, the bearish sentiment of the DXY remains intact as the index holds below the key 100-day Exponential Moving Average (EMA). The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline. Nonetheless, the oversold RSI condition indicates that further consolidation cannot be ruled out before positioning for any near-term DXY depreciation.
The key support level for the USD index emerges near the 103.10-103.00 zone, representing the lower limit of the Bollinger Band and the psychological level. Further south, the next contention level is seen at 102.27, the low of August 14, 2024. The additional downside filter to watch is 100.53, the low of August 28, 2024.
On the bright side, the first upside barrier for the DXY is located at 104.40, the high of March 6. Any follow-through buying above this level could pave the way to 106.35, the 100-day EMA. A decisive break above the mentioned level could see a rally to 107.38, the high of February 19.
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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