US Dollar Index Price Forecast: Hovers around 102.00 within overbought region
- The US Dollar Index could approach a nearly 18-month high of 102.53, recorded on Monday.
- The 14-day Relative Strength Index at 75.6 signals overbought conditions.
- The primary support lies at the lower boundary of the ascending wedge around 101.70.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding its position after posting modest gains the previous day and hovering around 102.10 after pulling back from nearly 18-month highs during the European hours on Tuesday.
The near-term bias is bullish, with price holding above both the nine-day and 50-day Exponential Moving Averages (EMAs), reinforcing a supported structure. The 14-day Relative Strength Index (RSI) around 75.6 shows overbought conditions, hinting that upside momentum is stretched even as the broader advance remains intact.
Additionally, the technical analysis of the daily chart indicates that the dollar index is moving upwards within the ascending wedge pattern, suggesting that a temporary bullish continuation is underway, but a bearish reversal or correction may occur upon reaching the pattern's apex or breaking its lower support boundary.
The US Dollar Index could find initial resistance at nearly an 18-month high of 102.53, reached on October 6, followed by the upper boundary of the ascending wedge at 102.80.
On the downside, the primary support lies at the lower boundary of the ascending wedge around 101.70, followed by the nine-day EMA of 101.60. A break below this confluence support area would cause the bearish reversal and put downward pressure on the dollar index to test the 50-day EMA of 100.37. Further declines would expose the four-month low of 98.56, which was recorded on August 20.
Dollar support underpinned as ISM services stays in expansion
Analysts at ING highlight that the latest US services data remain consistent with an economy still expanding, even if momentum has cooled slightly. They note that “the ISM services index eased to 54.9 from 55.4 (consensus 55.0), but remained firmly in expansion territory,” with “business activity and new orders softened” on the month. However, ING points out that “stronger employment and order backlogs, alongside a fresh high in prices paid, helped offset the decline,” reinforcing the view that underlying services-sector demand and inflation pressures are still resilient enough to keep the Dollar supported.
(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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