US Dollar Index Price Forecast: Heads for second week of gain above 101.00, upside bias intact
- US Dollar Index edges lower to around 101.15 in Friday’s early European session.
- Higher US Treasury bond yields and hawkish Fed comments strengthened expectations for further tightening.
- The first upside target to watch is 101.35; the key support level is located at 100.00.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 101.15 in the early European trading hours on Friday. The DXY declines on the day but heads for the second week of gain amid surging US Treasury bond yields and US rate hike bets. Traders await the Fedspeak later in the day for fresh impetus.
The 30-year US Treasury bond yield reached a high of 5.502%, a level not seen since June 2004 in the previous session, while the US 10-year Treasury yield climbed to 5.225%, a level not reached since June 2007. Rising Treasury yields and mounting bets on further Federal Reserve (Fed) rate hikes kept the greenback near two-month highs.
Markets are now pricing in nearly a 67.5% chance of a Fed October benchmark rate hike, up from 55.4% a week earlier and 11% a month earlier, according to the CME FedWatch tool.
Many Fed officials delivered hawkish remarks this week, with Philadelphia Fed President Anna Paulson saying, "Some modest further tightening may be warranted.” Additionally, New York Fed President John Williams stated that "another rate hike may be appropriate by the end of the year.”
"Whilst the dollar should get a bid from higher yields, there are still ongoing lingering concerns around the US fiscal position, the unpredictability of US policy making," said Khoon Goh, head of Asia research at ANZ.
Dollar strength drives US yields higher as China-US trade truce extended
Strategists at Brown Brothers Harriman emphasize that “the same forces lifting USD are driving Treasury yields higher and contributing to the global bond market selloff,” with US 10-year Treasury yields having “surged to 5.14%, the highest level since July 2007.” They note that the move has been underpinned in part by inflation expectations, as “10-year breakeven inflation rates edged up a bit on firmer crude oil prices.”
On the geopolitical front, BBH points to the “one-day summit between Chinese President Xi Jinping and President Donald Trump” as a key focus for markets. Treasury Secretary Scott Bessent “confirmed yesterday that both countries agreed to extend their trade war truce, which was set to expire on November 10, until January 10.” However, BBH also flags lingering uncertainty, with Bessent having “questioned whether a bigger trade deal with China can be done.”
Technical Analysis: US Dollar Index maintains a contructive tone amid overbought condition
In the daily chart, the near-term bias of Dollar Index Spot is bullish as price holds above the 20-day simple moving average (SMA) middle Bollinger band and the 100-day moving average, reinforcing a constructive trend backdrop. However, the move is stretched, with the Relative Strength Index (14) hovering in overbought territory near 70.5, suggesting upside momentum remains strong but vulnerable to a cooling phase.
On the topside, the immediate resistance level is seen at the upper boundary Bollinger band near 101.35, where buyers could begin to hesitate. Any follow-through buying above the mentioned level could pave the way to June 24 high of 101.80, en route to the 102.00 psychological level.
On the flip side, the initial support level aligns with the 100-day moving average at 100.00, followed by the 20-day SMA middle Bollinger band at 99.80. A deeper structural floor emerging around the September 9 low of 98.60 and the lower Bollinger band at 98.22.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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