USD Dollar Index (DXY) Price Forecast: Clings to gains above 99.00, near 23.6% Fibo.
- DXY regains positive traction following the previous day’s decline to over a one-week low.
- Geopolitical uncertainties and Fed rate hike bets continue to act as a tailwind for the USD.
- The neutral technical setup warrants caution for bulls before positioning for further gains.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, regains positive traction on Tuesday and reverses part of the previous day's slide to a one-week low. The index sticks to modest gains through the early European session and currently trades just above the 99.00 mark, up over 0.10% for the day.
The optimism over a potential US-Iran peace deal fades rather quickly amid reports that US forces conducted self-defense strikes in southern Iran on Monday, targeting missile launch sites and Iranian boats attempting to emplace mines. Moreover, a standoff over Iran's nuclear program and the Strait of Hormuz dampen hopes for an agreement to end a nearly three-month-old Iran war, which, in turn, benefits the safe-haven Greenback.
Meanwhile, the latest developments keep geopolitical risks in play and help Crude Oil prices to recover slightly from an over two-week low, touched on Monday, reviving inflationary concerns. This, in turn, bolsters the case for a more hawkish US Federal Reserve (Fed), which turns out to be another factor underpinning the buck. The USD bulls, however, seem hesitant and opt to wait for further clarity surrounding the Middle East crisis.
From a technical perspective, the DXY found some support and bounced off the vicinity of the 200-period Exponential Moving Average (EMA) on Monday. This configuration suggests a tentative floor emerging in the high-98.00s. The subsequent move up, however, lacks follow-through beyond the 23.6% Fibonacci retracement level of the recent upswing from the monthly low, leaving the near-term tone neutral and warranting caution for bulls.
Meanwhile, the Moving Average Convergence Divergence (MACD) remains slightly negative, and the Relative Strength Index (RSI) around 47 hints at a lack of directional conviction after the recent pullback. In the meantime, initial resistance is located at the cycle high near 99.54, which guards further gains.
On the downside, immediate support is anchored at the 23.6% retracement around 99.08, backed by the 200-period EMA at 98.88. A convincing break below the latter would expose successive Fibo. supports at 98.80, 98.58, and 98.35, with deeper floors at 98.03 and 97.62 if selling pressure accelerates.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar Index 4-hour 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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