Home Forex Markets The dollar index is accumulating strength to hit the 100 mark

The dollar index is accumulating strength to hit the 100 mark

by WOOWinvest
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Hawkish Fed outlook, protracted Russia-Ukraine conflict to support dollar index

This week the Federal Reserve raised interest rates for the first time since 2018, but the dollar noted that it has almost returned to pre-2020 easing levels. In other words, while interest rates and balance sheets are far from returning to the state they were in early 2020, the US dollar index has already received a decline caused by the big easing.

This is really confusing, but if you understand the structure of the US dollar index, the problem will be solved, because the US dollar index (DXY) we are focusing on basically only reflects the strength of the US dollar against currencies such as the euro, yen, pound and Canadian dollar. However, the monetary policies of central banks such as the European Central Bank and the Bank of Japan have been and will be more accommodative than the Fed for a long time in the past, which has led to the result of a strong dollar index.

If the expectation of a rate hike by the European Central Bank in January this year had the possibility of weakening the dollar index, the outbreak of the Russian-Ukrainian conflict in late February killed this possibility. At present, the European Central Bank has not clearly ruled out the hope of raising interest rates this year, but looking back at the performance of the European Central Bank – its judgment has always been far behind economic changes, and the European Central Bank is likely to return to the level of maintaining the “temporary inflation theory” in the future. Loose stance, although inflation will remain elevated.

In contrast to the Federal Reserve, although Fed Chairman Powell said that “the impact of the Russian-Ukrainian conflict on the U.S. economy is highly uncertain,” the U.S.-Russian trade relationship and geographical location determine that the impact of the conflict on the United States will be far less than the impact on the euro area. So we see that no matter what Fed officials are suggesting on the dot plot, or what the market is pricing in at the moment, the expectation of a total of seven rate hikes during the year has not changed.

Of course, the result of the conflict between Russia and Ukraine is not only beneficial to the US dollar index from the perspective of relative monetary policy, but also when a war in Europe is good for the US dollar index, it is obvious that the funds in the euro area will have a strong risk-aversion tendency. And the US will be the biggest safe haven.

US Dollar Index Technical Analysis

The daily chart shows that the U.S. dollar index held steady at key support at 97.80, the level at the intersection of the 20-day moving average and the upward pressure line since November last year, which could mark the end of a pullback in the first four sessions of the week. If it meets expectations, the US dollar index will strengthen and re-point to the key resistance level of 99.30 since March 8. Once this support is effectively broken in the future, it will open the door to challenge the 100 mark.

If it falls again in the short term, continue to pay attention to the support near 97.80. If it breaks below the support, it will have to temporarily abandon the bullish position, and further declines may point to levels such as 97.40 and 97.00. (Follow the author on Twitter @Legen_DailyFX )

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