Is the US dollar index (DXY) a good buy in October 2021?

The US dollar index (DXY) had a relatively strong month in September as fear spread across the financial market. The index is trading at $94.32, which was the highest level since September 28 last year. It has risen by more than 5.77% from its lowest level this year.

Why the DXY jumped in September

There are several reasons why the US dollar index rallied sharply in September. First, the US published relatively strong economic numbers that pointed to a strong economic recovery. The data showed that the country’s unemployment rate dropped in August while inflation held steady above 2%. 

Additional numbers showed that the housing market remained steady in August while retail sales did well even as prices remained high. 

Second, these numbers pushed the Federal Reserve to turn a bit hawkish in its September interest rate decision. In it, the bank decided to leave interest rates unchanged at the range of 0% and 0.25%. The bank also hinted that interest rates will likely start rising in 2022. It also pointed to the tapering of asset purchases in the near term.

Third, the US dollar index rose because of the rising risks around the world. For example, the Evergrande crisis pushed more investors to safe havens as they feared that its collapse will lead to global contagion. The company, which is the second-biggest real estate developer in China, has more than $306 billion in liabilities.

There are also risks that the US government will default on its debt obligations. Congressional Republicans have hinted that they will not support measures to increase the debt ceiling. A default will lead to a significant cost of borrowing.

In October, the US dollar index will react to actions by other central banks since the Fed won’t meet during the month. The banks that will meet are the Bank of Japan, Bank of Canada, and the European Central Bank (ECB).

US dollar index forecast

The DXY index has been in a major bullish trend in the past few weeks. The index managed to move above the key resistance level at $93.70, which was the previous highest level this year. It had struggled to move above that level several times in September, August, and July. 

The US dollar index has moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has jumped to the overbought level. It is also above the ascending trendline shown in red. Therefore, the index will likely keep rising in September as bulls target the key resistance at $95.