DXY: Dollar index tilts lower as US real yields hit a record low

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Jul 27, 2021
  • The US dollar index tilted lower as US real yields declined.
  • The real yield is a measure of returns that factors in inflation.
  • The FOMC will start its meeting on Tuesday and deliver its decision on Wednesday.

The US dollar index (DXY) retreated from its highest level last week as a key gauge of America’s inflation retreated ahead of the Fed decision. The index dropped to $92.53, which was about 0.70% below the highest point this week.

US real yields drop to record low

The biggest catalyst for the US dollar index this week will be the upcoming Fed interest rate decision. The bank will start its meeting on Wednesday and publish the decision on Wednesday. Analysts expect that the bank will leave interest rates unchanged at the range of 0% and 0.25%. 

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Unlike the Bank of Canada and Reserve Bank of New Zealand (RBNZ), they expect that the bank will maintain its quantitative easing policy intact. Through this program, the bank is buying assets worth $120 billion per month.

The decision comes at a time when the US is battling a new Covid outbreak. The number of Covid cases has risen in almost all states. And in a statement, Biden’s key advisor said that the government will consider ordering a new mask mandate even among the vaccinated.

Most importantly, the decision comes at a time when the real yield has dropped to a record low. Real yield of the 10-year US Treasuries declined below zero on Monday, posing significant risks to pension funds and other large investors. The real yield measures the returns investors expect after factoring in inflation. 

Further, nominal bond yields have also declined substantially from their highest point early this year. The 10-year bond yield declined to 1.25% while the 30-year has fallen to 1.934%. 

Therefore, the dollar index has probably declined because investors expect that the Fed will maintain its policy unchanged. Later today, on Tuesday, the DXY will react to the latest consumer confidence and durable goods orders data.

US dollar index technical analysis

US dollar index
US dollar index chart

The 4H chart shows that the DXY index has formed an ascending channel shown in black. The price is now slightly above the lower line of the ascending channel. It has also moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved close to the oversold level. 

Therefore, the index will likely break out lower ahead of the FOMC decision. If this happens, the next key level to watch will be $92, which is about 0.65% below the current level.

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