DXY: 2 reasons why the US dollar index is surging

By: Crispus Nyaga
Crispus Nyaga
Crispus is a Financial Analyst for Invezz covering the stock, cryptocurrency and forex markets. He’s an experienced analyst with… read more.
on Mar 13, 2022
  • The US dollar index has surged to the highest level in almost two years.
  • The ongoing crisis in Europe has led to a demand for safe haven.
  • The Fed is expected to start hiking interest rates this week.

The US dollar index (DXY) has done well in the past few weeks as demand for safe havens rose. The index is trading at $99.12, which is close to its highest level since May 2020. It has surged by over 11% from its lowest level in 2021.

Federal Reserve and safe-haven

There are two main reasons why the US dollar index has risen sharply in the past few weeks: safe-haven demand and the Fed.

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The US dollar has crashed as investors worry about the ongoing crisis in Europe. During the weekend, Russia continued its assault on Ukraine. It even killed tens of people at a military base near Poland.

In times of global crisis, investors tend to move to the safety of the US dollar. For example, the DXY index jumped sharply in March 2020 as the World Health Organization (WHO) declared Covid-19 a global pandemic. 

This happens because of the stability of the American economy and the fact that the currency is the world’s currency reserve.

The second reason is that the Federal Reserve is expected to start hiking interest rates this week. The bank will start its meeting on Tuesday and then deliver its decision on Wednesday evening. Analysts expect that the Fed will deliver a rate hike and point to further hikes this year.

Recent numbers have made a case for more tightening. For example, data published last week showed that American consumer inflation jumped to a 40-year high last month. And there is a likelihood that inflation will keep rising in the coming months because of the rising cost of commodities. 

Meanwhile, data published a week earlier revealed that the American labor market is tightening at a faster pace. The unemployment rate dropped to 3.8% as the economy added over 600k jobs.

US dollar index forecast

dollar index

Turning to the weekly chart, we see that the DXY index has been in a strong bullish trend in the past few months. Along the way, the index has managed to move above the 61.8% Fibonacci retracement level.

The dollar index also rose above the 25 and 50-week moving averages while the Relative Strength Index (RSI) has moved above the overbought level. Therefore, there is a likelihood that it will keep rising in the coming weeks as bulls target the next key resistance at $100. This view will be invalidated if the index moves below $98.

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