US dollar index strength to continue in 2022 – BNP Paribas

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at He lives in Nairobi with his… read more.
on Jan 3, 2022
  • The US dollar index did well in 2021 as an uneven recovery happened.
  • The Federal Reserve will continue tightening in 2022.
  • Analysts at BNP Paribas expect the dollar strength to continue.

The US dollar had a strong performance in 2021 after its remarkable meltdown in 2020. The DXY index rose by about 7.50% from its lowest level in 2021. It is about 5.5% below the highest level in 2020.

Fed tightening

There are three main themes that will have an impact on the US dollar index in 2022. The most important will be the Federal Reserve, which is expected to continue tightening as inflation rises. The Fed is expected to end its quantitative easing (QE) program in March. It is then expected to implement three rate hikes during the year.

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In the past Fed decision, the bank changed its view that the ongoing inflation surge is temporary. As a result, the bank hinted that a tighter policy will be necessary. This is in line with other central banks like the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ).

The second key catalyst for the US dollar index will be the Omicron variant. Recent data shows that the number of cases is rising in the United States and other countries like the UK. The only positive thing is that Omicron has mild symptoms than Delta and the first variant.

The third catalyst for the DXY index will be on geopolitics. There are issues surrounding the Iran nuclear process, Russia and Ukraine, and China and Taiwan. 

Analysts are divided about the performance of the dollar index in 2022. Some analysts believe that the dollar will continue strengthening in 2021 because of the Fed. In a note, analysts at BNP Paribas said:

“We expect broad dollar strength against the euro, yen and Swiss franc, where front-end rates are more firmly anchored than U.S. rates.”

Other analysts are more cautious about the US dollar. For example, those at Citigroup said:

“While we have a bullish dollar bias, the currency has moved a long way, and we do not currently see a compelling entry point. This brings us back to neutral.”

US dollar index forecast

US dollar index

The daily chart shows that the DXY index has been in a strong bullish trend in the past few months. The index has risen to the 50% Fibonacci retracement level. It has also managed to move above the 25-day and 50-day moving averages while the MACD has continued rising. 

Therefore, the index will likely keep rising as bulls target the key resistance at $98, which is about 2% above the current price.

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