US Dollar Index Price Forecast: Keep a bearish vibe, crucial support level emerges near 98.00
- The US Dollar Index trades on a weaker note near 98.55 in Wednesday’s early European session, losing 0.28% on the day.
- The negative outlook of the index remains in play below the 100-day EMA with a bearish RSI indicator.
- First support level to watch is in the 98.00-97.90 zone; key resistance level to watch is the 100.00 psychological level.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, attracts some sellers to around 98.55 during the early European trading hours on Wednesday. Traders continue to assess the conflict between Israel and Iran ahead of a Federal Reserve (Fed) decision on interest rates later on Wednesday.
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) stands below the midline near 43.80.
The initial support level for the USD index is located in the 98.00-97.90 zone, representing the psychological level and the lower limit of the Bollinger Band. Sustained trading below the mentioned level could expose 97.61, the low of June 12. A breach of this level could see a drop to 96.55, the low of February 25, 2022.
On the other hand, the key resistance level for the DXY emerges at 100.00, portraying the psychological figure and the upper boundary of the Bollinger Band. A decisive break above this level could pave the way to 101.65, the 100-day EMA. The next upside barrier is seen at 101.98, the high of May 12.
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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