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DXY soars amid expected rate increases


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The US Dollar Index’s five consecutive daily gains have taken it to levels last seen in May 2020 on the back of hawkish comments made by the Fed’s Vice Chair-elect, Lael Brainard, and March FOMC minutes.

US Dollar IndexSource: Bloomberg
 
 Axel Rudolph | Market Analyst, London | Publication date: Thursday 07 April 2022 

Yesterday the US Dollar Index (DXY) briefly traded at near two-year highs as bonds dropped aggressively and equites sold off in the wake of comments by the US Federal Reserve’s (Fed) Vice Chair-elect, Lael Brainard, which put the reduction in Fed’s balance sheet back at the centre of the monetary policy discussion.

The market’s rationale seems to be that if Brainard, a notorious dove, is on board with rapid tightening, then her Federal Open Market Committee (FOMC) colleagues must be thinking along the same lines.

Market participants are thus not just factoring in successive 50 basis point hikes in the US this year, but also an oversupply of treasuries that were bought up during the emergency policy era of the pandemic.

All of the above has benefitted the greenback, which often acts as a safe haven, with the US Dollar Basket rising by around 1.75% to 99.67 - levels last seen in May 2020 - in the past five consecutive up days alone.

The index has risen by over 3.5% year-to-date and has advanced by over 7.5% in the past year.

DXY daily chartSource: ProRealTime

 

The psychological 100.00 mark is within reach now that a brief break out of its one-month consolidation phase has occurred.

For the past month or so the index has been capped by the 99.29 to 99.45 resistance area but repeatedly bounced off the 97.78 to 97.69 support zone.

The medium-term the trend will remain bullish while the index - which has a 57.6% euro, 13.6% Japanese yen, 11.9% pound sterling, 9.1% Canadian dollar and to a lesser degree Swedish krona and Swiss franc weighting - remains above the late March low at 97.69 on a daily chart closing basis.

DXY weekly chartSource: ProRealTime

 

Technical upside targets are the 100.60 May 2020 high, the 100.98 late April 2020 and the 101.03 early April 2020 highs. Then there are the January 2017 and March 2020 highs at 103.80 to 103.82.

Potential slips should find support between the 22 March high at 98.94 and the 25 March 98.40 low.

Only a false breakout and subsequent slide through the late March low at 97.69 would negate the current bullish picture and instead put the January high and 55-day simple moving average (SMA) at 97.39 to 97.28 back on the map.

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