US Dollar Index: Find Out with ETMarkets: What is the Dollar Index and where is it headed?

The US Dollar Index is the measure of the US dollar against a basket currency. It was founded by US Federal Reserve in 1973 with base 100 after the collapse of the Bretton Woods Agreement.

The six currencies included in the US dollar index are major US trading partners. This index is only replaced once when the Euro replaces Mark Germany, French Franc, Italian lira, Dutch Guilder and the Belgian Franc.

It is calculated by factoring in the exchange rates of six foreign currencies such as Euro (57.6%), Japanese Yen (13.6%), Canadian Dollar (9.1%), British Pound (11 .9%), Swedish Krona (4.2%) and Swiss Franc. (3.6%).

The US dollar has a history of volatile volatility and hit an all-time high of 165 in 1984 and an all-time low of 70 in 2007. Overall, the index has been relatively volatile around from 90 to 110.

Current movement

The current movement of the dollar index begins on May 2, 2021, when it made a low of 89.39 and a high of 109.44 on August 29, 2022. after reversing from a six-week low of 104.63 rose nearly 4.60 percent, reaching a high of 109.44.

Currently, the dollar index is at 108.73 with support at 107.40 and resistance at 109.50. A breach of 107.40 would take it to 105, which is the critical support while a breach of 109.50 would take it higher towards the 111-112 band.

The reason for the increase in the price of the dollar index

The dollar has edged higher as the Fed raises US interest rates aggressively to 2.25% so far. Fed officials and Chairman Jerome Powell are very open about interest rates as they want to reduce inflation from 8.50 to 2%.

During the Jackson Hole meeting of Central Bank Chairs on August 27, 2022, Powell said that the main goal of the US Fed now is to reduce inflation to 2% even if that requires some hope. birth on growth.

Fed officials have seen little evidence that U.S. inflationary pressures are easing and bolstered themselves to force the economy to decelerate to control the ongoing upside momentum, FOMC minutes said.

U.S. Central Bank policymakers are committed to raising rates as high as necessary to contain inflation — even as they begin to more clearly acknowledge the risks that may be too far and can stifle economic activity and the labor market too much.

The FOMC is scheduled to meet on September 20 and 21, 2022, to announce a decision on the rate that after the Jackson Hole meeting is expected to increase by 75 bps.

In contrast, despite higher inflation, the rate increase in the Eurozone has so far been only 50 bps while in the UK it has been 125 bps.

The Central Banks of the Eurozone and the United Kingdom are not hawkish enough to ensure that their currencies do not depreciate. Euro is at a 20-year low while GBP is at a two-year low. Hawkish ECB expectations are underway ahead of next week’s policy decision.

The Bank of Japan is still following an easy monetary policy with interest rates steady at -0.10% and as a result the JPY has fallen from around 102 to 140 against the dollar.

Higher US yields and strong overseas buying are keeping the USD/JPY rate strong.

How will the dollar index move from here?

Due to the above reasons, the dollar index seems to be in an uptrend and could see levels between 111 and 112.

A close below 104 could suggest an even more rapid decline towards 99 is possible if the market starts to take the hit of the US recession and current account deficit above 5%.

Currently, the US labor market is very strong and with the Fed raising interest rates, the decline in the dollar index is buying.

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