• US Dollar Index may test the initial barrier at the nine-day EMA of 101.14.
  • The FXS Fed Sentiment Index at 147.58 signals ongoing policy support for a stronger US Dollar Index.
  • The DXY may find primary support at the 50-day EMA at 100.54.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after two days of losses and trading around 101.00 during the European hours on Thursday. The DXY is holding a mildly bullish near-term bias as it stays above the 50-day Exponential Moving Average (EMA). However, the advance is capped in the short run by the nine-day EMA.

The 14-day Relative Strength Index (RSI) around 51 suggests balanced but slightly positive momentum, while the elevated FXS Fed Sentiment Index at 147.58 hints that policy expectations remain supportive for the dollar, even as price consolidates just beneath near-term resistance. However, the technical analysis of the daily chart indicates that the dollar index is trading slightly below the ascending channel pattern, suggesting a potential for a bearish reversal.

The US Dollar Index would find the immediate barrier at the nine-day EMA of 101.14. A rebound within the ascending channel would reinforce the bullish bias and support the dollar index to test the 14-month high of 101.80, which was recorded on June 24, followed by the upper boundary of the channel around 103.60.

On the downside, the primary support lies at the 50-day EMA at 100.54. Further declines would cause the bearish emergence and put downward pressure on the US Dollar Index to navigate the region around a nearly five-month low of 97.62, recorded on May 6.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar FAQs

The US 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 is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD 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 went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.