The US Dollar Index (DXY) spent the second half of this week doing something that most desks wrote off six months ago: rising on the prospect of a Federal Reserve (Fed) interest rate hike. The index hit a fresh 13-month high before starting to decline; the move was less about flying to a secure haven than a icy reading of the differences in rates. Since the Federal Open Market Committee (FOMC) adopted a hawkish stance at its June meeting, the dollar has become the purest form of play for the only major central bank still willing to tighten in the face of an energy shock.
Yield gap, not panic
Beneath the geopolitical noise, the dollar’s offer hides a history of profitability. The Fed positioned itself higher for the long while the field around it stalled or blinked. The Bank of England (BoE) and the Swiss National Bank (SNB) remained forceful this week, with the dollar posting the biggest gains against the pound and franc. Even the European Central Bank (ECB), which carried out the first augment since 2023, is tightening its defensive policy, moving towards a contracting rather than a forceful economy. this distinction is all trade.
Warsh pulls the lead rug
New Fed Chairman Kevin Warsh used his first meeting to do less, not more. As expected, the Committee maintained the level of 3.75%; the updated scatterplot told the real story, with rate forecasts revised upwards overall and the median now reflecting the trend towards increases this year. Warsh himself declined to signal a next move, relying instead on the assumption that inflation has remained above target for years and that restoring price stability was paramount. Markets took the hint and ran: CME FedWatch prices now leaning towards a hike through the fall, and inflation forecasts revised upwards amid conflict in the Middle East. A central bank that doesn’t promise cuts in a world where everyone is locked in is a huge tailwind for its currency.
The number that settles it
Each bar of this rally is implicitly long, supporting the Fed’s hawkish thesis, which means the dollar will face its first real audit next week. There was a uncommon double-header at 12:30 GMT on Thursday: the third estimate of Gross Domestic Product (GDP) for the first quarter was in line with the May Consumer Expenditures Price Index (PCE), the Fed’s preferred measure of inflation. The growth imprint confirms 1.6%, up from the initial 2.0%; therefore, the focus is on PCE. Core PCE is already ready to accelerate to 0.3% m/m from 0.2%, which even means core inflation will accelerate again; a positive surprise that comes after the main consumer price index (CPI) rose above 4% y/y in May would cement the price of the hike and send the index back to testing its highs. A cushioned one would reveal how much good news is already priced in.
Resistance: Round 101.00 closes the immediate advantage, just above it is this week’s 13-month high; a neat break opens the room towards 102.00.
Support: Initial support is near 100.50, then psychologically reaching 100.00; below, the 50-day and 200-day exponential moving average (EMA) are near 99.00 points where the trend could be challenged. The hourly Stochastic Relative Strength Index (Stoch RSI) fades out near oversold, proving that the current decline is more of a pause than a turnaround.
Deviation: Bullish as the index holds above 100.00 and the Fed’s hawkish narrative persists into next week’s data. Hot PCE Keeps Path Open to 102.00; The negative inflation surprise is the only catalyst that turns this stretched but intact rally into a deeper pullback towards 99.00.
US Dollar Index Hourly Chart
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.
