DXY rose about 0.55% on Tuesday, rising to about 99.09 and extending Monday’s keen move higher. The index has clearly broken out of the 97.00 to 98.50 consolidation range that has been in place for most of February, and Monday’s powerful bullish candle marked the largest single-session gain in weeks.
The escalation of the conflict in the Middle East is the main catalyst for the search for a unthreatening haven for the US dollar. American and Israeli attacks on Iran over the weekend prompted Iran’s Revolutionary Guard to announce the closure of the Strait of Hormuz, effectively halting tanker traffic through a bottleneck that accounts for about 20% of global oil consumption. Brent crude rose to around $79 a barrel, fueling fears of a novel inflationary impulse that could delay the Federal Reserve’s (Fed) monetary easing schedule.
On the domestic side, the Fed is keeping interest rates at 3.50% to 3.75%, and minutes from the Federal Open Market Committee (FOMC)’s January meeting showed several officials discussed the possibility of raising interest rates if inflation remains above target. Monday’s report from the Institute for Supply Management (ISM) for the manufacturing sector was stronger than expected at 52.4, while the price paid sub-index rose to its highest level in three and a half years. Markets continue to price in two 25 basis point cuts this year, but rising energy costs and sticky producer prices complicate that outlook.
DXY daily chart
Technical analysis
On the daily chart, the Dollar Index Spot rate is 99.10. The short-term bias is slightly bullish as price has reclaimed the 50-day exponential moving average near 97.90 and is moving away from this area, while the 200-day average above 99.10 continues to close out the broader trend. Stochastic remains in overbought territory after rising strongly from readings below 20, signaling powerful upside momentum but also increasing the risk of a break or brief consolidation as the index tests higher.
Initial resistance appears around the 200-day EMA at 99.15, with a sustained break pointing to the 100.00 area as the next upside target. On the other hand, immediate support is located at the 50-day EMA near 97.90, which will be followed by a recent reaction low at 97.00 if a pullback occurs. As long as the index remains above the 97.90 area, the path of least resistance favors further tests of the 99.15 barrier.
On the weekly chart, the Dollar Index Spot rate is 99.11. The short-term bias is neutral with a slight downward bias as price holds below the gently sloping 200-week exponential moving average near 100.45, keeping the broader trend under pressure. Recent weekly closes indicate difficulty in breaking out of the 100.00 area, suggesting that upside attempts are being restricted in the dominant medium-term range. The stochastic rate has risen from the oversold area but remains in the mid-range, indicating only moderate recovery dynamics and lacking the strength to confirm a sustained bullish reversal at this stage.
Initial resistance appears at the psychological 100.00 area, and the 200-week EMA at 100.45 reinforces this ceiling; a weekly close above this zone would be necessary to move the bias significantly higher towards 101.00. On the other hand, immediate support approaches 98.00, protecting the lows at the end of the pullback, with the breakout exposing another bearish level near 97.00. As long as the index trades between 98.00 and 100.45, range conditions will likely dominate and momentum signals will be watched to confirm a possible breakout.
(The technical analysis for this story was written with the lend a hand of an AI tool.)
US Dollar FAQs
The United States 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 circulates alongside local banknotes. As of 2022, it is the most popular currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions daily. After World War II, the US dollar 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 was abolished.
The single most essential factor influencing the value of the US dollar is the monetary policy set by the Federal Reserve (Fed). The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is the adjustment of interest rates. When prices rise too brisk and inflation exceeds the Fed’s 2% target, the Fed will raise interest rates, which will improve the value of the USD. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may lower interest rates, which will negatively impact the dollar.
In extreme situations, the Federal Reserve can also print more dollars and implement quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in a gridlocked financial system. This is an unusual policy measure used when credit runs out because banks will not lend to each other (for fear of default by the counterparty). This is a last resort when lowering interest rates alone does not produce the desired result. This was the Fed’s weapon of choice in the fight against the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more dollars and using them to buy U.S. government bonds, mostly from financial institutions. QE usually leads to a weakening of the US dollar.
Quantitative Tightening (QT) is the reverse process in which the Federal Reserve suspends bond purchases from financial institutions and does not reinvest the principal amount of maturing bonds in novel purchases. This is usually positive for the US dollar.
