DXY: US dollar index spikes as risk aversion sets in

DXY: US dollar index spikes as risk aversion sets in
Written by:
Crispus Nyaga
November 2, 2020
  • Risk aversion pushed the US dollar index to the highest level since September 29.
  • Investors are focusing on the US election, new lockdowns in Europe and the upcoming economic events.
  • On Thursday, the Fed will release the interest rate decision followed by the nonfarm payrolls numbers.

The US dollar index (DXY) is up slightly today as traders prepare for a relatively busy week with the US election, Federal Reserve meeting, and nonfarm payrolls happening. The index is trading at $94.12, which is slightly higher than the intraday low of $94.00.

Dollar index
Dollar index rises to highest level since September 29

Risk aversion sets in

The biggest driver for the dollar index today is risk aversion as the number of potential events rise. The biggest event this week is the US election, which will take place tomorrow. Going by the latest polls, analysts and investors believe that Joe Biden, the former vice president will win.

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However, they all realise that polls have been wrong before. They were wrong in 2016 during the Brexit vote and the previous US election. Also, they are worried about the possibility of a contested election or delayed results because of the vast number of Americans voting by mail.

The dollar index is also rising because of the risk of more lockdowns as the number of Covid-19 cases in Europe and the United States. Yesterday, the UK became the first major country to announce a major lockdown that will see most businesses closed. Germany, too, has started another partial lockdown that will see bars and restaurants closed.

Investors are worried that the current growth will fade. Today, data by Markit and the Institute of Supply Management (ISM) has shown that the manufacturing sector did well in October. In Europe, the PMI in most countries was above 50, which is a sign of expansion.

In the United States, data from Markit showed that the manufacturing PMI rose to 53.4 from 53.3. Another data from ISM showed that the PMI rose to 59.4, which is the highest it has been since 2014. Therefore, if countries and states implement new lockdowns, investors worry that the US and Europe will see a W shaped recovery. In a statement, Chris Williamson of Markit said:

“It’s inevitable that the pace of economic expansion will weaken after the surge seen in the third quarter, but the strength of the PMI hints at a recovery for which the underlying trend continues to strengthen at the start of the fourth quarter.”

The dollar index also has eyes to other events later this week. On Thursday, the Fed will deliver its interest rate decision followed by the nonfarm payrolls numbers on Friday.

US dollar index technical analysis

US dollar index
Dollar index technical chart

The four-hour chart shows that the dollar index has been in an upward trend since September 21, when it fell to a low of $92.45. Today, it has risen to the highest level since September 29. The price is above the 15-day and 25-day exponential moving averages while the awesome oscillator is above the neutral line.

It has also moved above the 23.6% Fibonacci retracement level. Therefore, the upward trend is likely to continue as bulls aim for the next resistance level at $94.50. Become an excellent trader with our free forex trading course.