DXY index analysis: Here’s why the US dollar is soaring

The US dollar index continued its strong surge this week as the greenback gained against most currencies. The DXY surged to a high of $108.50, its highest level since 2022, and 8.30% higher than its lowest level this year. 

US dollar index surge accelerates

The greenback has jumped sharply against most emerging and developed country currencies after the most central banks delivered their decision this week.

• The EUR/USD pair crashed to 1.0361, its lowest level since November 2022. This is notable since the euro is the biggest part of the dollar index.
• The USD/JPY exchange rate jumped to 158, its highest level since August this year, and about 13% higher than the September low.
• The GBP/USD pair fell to 1.2490, its lowest swing May this year, and about 7% below the year-to-date high. Its sell-off accelerated after the Bank of England left interest rates unchanged at 4.75%.
• The USD/CNY exchange rate rose to 7.3, its highest level in a few months.

The US dollar also rallied against other currencies, especially those in the emerging markets. For example, it has moved to a record high against currencies like the Indian rupee, Turkish lira, Argentina peso, and Brazilian real. 

This performance happened because of the Federal Reserve decision, which concluded its two-day meeting on Wednesday. It decided to slash interest rates by 0.25% as most analysts were expecting.

The Fed’s decision was highly hawkish since officials hinted that the bank would only slash rates two times in 2025. This was a big change because the bank had hinted that it would cut rates by four times in 2024 as it remained focused on the labor market.

The Fed has now shifted its focus on inflation, which has remained stubbornly high this year. Core inflation has remained at 3.35, while the headline consumer price index (CPI) rose from 2.4% to 2.7% in November. This means that it continued moving further away from the Fed’s target of 2.0%. 

The Fed’s key concern is that Donald Trump's plans will have an impact on inflation. Trump wants to deport millions of illegal migrants from the United States, a move that will affect key areas like construction and agriculture. 

He also wants to implement large tariffs on most imports, especially from China, Canada, and Mexico. These tariffs will be passed to consumers through higher prices and will not help to improve the country’s trade deficit. 

Still, the Fed’s statement is not cast on stone. For example, last year, the bank hinted that it would deliver several rate cuts this year. It ended up doing just three. The bank will likely continue to react on incoming data when making its interest rate decisions.

DXY index analysis

The daily chart shows that the US dollar index has continued its strong uptrend in the past few months. It has jumped from near 100 to over 108.50 today. Most recently, it moved above the key resistance level at 107.30, its highest swing on October 23rd.

The index also formed a golden cross as the 50-day and 200-day moving averages crossed each other. Oscillators like the Relative Strength Index (RSI) and the MACD have all pointed upwards. 

It also formed an inverse head and shoulders chart pattern. Therefore, the DXY index will likely continue rising as bulls target the next psychological point at 110.