The US dollar index (DXY), which tracks the value of the dollar against a basket of six major currencies, rose on Friday, recovering from earlier weakness, although it remains on track to end the week in the red.
It was a volatile week for the US dollar, with price action driven by suspected intervention by Japanese authorities, continued tensions in the Middle East and renewed trade concerns. At the time of writing, DXY is trading around 98.21, rebounding from a two-week low of 97.72 hit earlier in the day.
Trade tensions returned after US President Donald Trump threatened to raise tariffs on European car imports by up to 25%, offsetting an earlier improvement in risk attitudes following reports that Iran had presented a fresh proposal through Pakistani mediators aimed at ending the war. While the proposal raised hopes for a resumption of talks, tensions remain high amid differences over Iran’s nuclear program.
In this situation, with renewed threats to trade, the dollar is likely to remain supported in the near term, despite the still tender technical outlook.
Technical analysis:
On the daily chart, the Dollar Index maintains a short-term bearish tone, trading below key moving averages. The 100-day elementary moving average (SMA) at 98.47, the 200-day SMA at 98.56, and the 50-day SMA near 98.98 form an overhead layered resistance zone, containing any upside attempts.
Momentum readings are supple rather than capitulating, with the Relative Strength Index (RSI) hovering in the low 40s and the Moving Average Convergence Divergence (MACD) still marginally negative, suggesting downward pressure remains, but without a clear oversold signal.
The downside is that initial support is at the horizontal level near 98.00, where buyers have previously emerged to stabilize the decline. On the other hand, a recovery would first need to reclaim the 100-day SMA at 98.47, closely followed by the 200-day SMA at 98.56 within an overloaded resistance band, while the 50-day SMA near 98.98 represents a higher hurdle that must be cleared to ease the prevailing bearish sentiment.
(The technical analysis for this story was written with the aid 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 critical 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 rapid 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 the 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 bring the required 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 fresh purchases. This is usually positive for the US dollar.
