DXY: US dollar index sparks higher after a dark IMF report

The US dollar index (DXY) rose by almost 0.37% as investors reacted to the rising coronavirus cases and the warning by the IMF. The index is trading at 106.911, which is higher than yesterday’s low of 96.40. The greenback has gained against all constituent currencies.

US coronavirus cases rise

The US dollar is the most important currency in the world because of its role as a reserve currency of the world. As a result, the currency tends to rise when global risks rise because of increased demand.

Today, investors are worried about the rising coronavirus cases in the United States. According to health officials, the country reported more than 36,000 cases yesterday. That was the highest daily gain since May this year.

The number of cases is expected to rise, according to Anthony Fauci. In a statement to congress yesterday, the respected medic warned of a “disturbing surge” in the coming weeks. He said:

“The next couple of weeks are going to be critical in our ability to address those surges that we are seeing in Florida, in Texas, in Arizona and other states.”

Recent data shows that the number of new infections and hospitalisation is increasing. Indeed, seven states, including Arizona, California, and South Carolina, reported their highest tally to date.

As a result, the European Union has suggested that it will not allow American flights when it reopens its borders. This announcement came weeks after China said that it would bar Americans from visiting. At the same time, cases have been rising in Germany, Japan, and South Korea.

The US dollar index tends to do well when the number of cases rise. As shown below, the index reached its highest point in years at the height of the pandemic.

IMF warns of global slowdown

The US dollar index also reacted to a warning by the IMF. In a report, the organisation said that the global economy will have a deeper slowdown than earlier estimated.

It is now expecting the global GDP to fall by 4.9%, which is a few points above its April prediction of 3%. Further, it expects the economy to shrink by 5.4% in 2021. As such, this will be the worst slowdown in the world economy since the Great Depression.

In the report, the fund based its argument on the sharp decline in supply and the impacts of the social distancing measures imposed by governments. The report said:

“With the relentless spread of the pandemic, prospects of long-lasting negative consequences for livelihoods, job security and inequality have grown more daunting.”

Also, the fund warned about a surge in global debt in reaction to the crisis. The fiscal package announced so far amounts to more than $11 trillion. While the package has helped stabilise the economy, it has also placed the economy at risk.

The fund now expects the US economy to contract by 8% this year and grow by 4.5% in 2021. That is a sharper decline than the OECD’s estimate of a decline of 7.3%. Additionally, it expects the euro area to shrink by 10.2% this year.

As the US dollar index rose, the Dow Jones and S&P 500 declined by more than 2%.

US dollar index technical analysis

The US dollar index is trading at $97.06. On the daily chart, it is trading below the 50-day and 100-day exponential moving averages. The price is also returning to the previous channel that is shown in pink. This channel was a bearish flag, which means that the price is likely to continue falling as bears target the previous low at $95.76.