The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, attracts some dip-buyers near the 101.60-101.55 region on Monday and looks to build on Friday’s recovery from the vicinity of a three-week low. The index clings to modest intraday gains through the early European session, though it lacks follow-through and remains below the 102.00 mark as traders opt to wait for more cues about the Federal Reserve’s (Fed) policy path.
Hence, the focus will remain glued to the outcome of a two-day FOMC meeting on Wednesday and Fed Chair Kevin Warsh’s comments during the post-meeting press conference. Apart from this, the release of the Advance US Q3 GDP report and the Personal Consumption Expenditures (PCE) Price Index on Thursday will play a key role in determining the next leg of a directional move for the DXY.
In the meantime, the growing acceptance that the US central bank will raise borrowing costs amid inflation risks stemming from elevated crude oil prices acts as a tailwind for the US Dollar (USD). Furthermore, the geopolitical risk remains in play amid tensions between the Iran-backed Houthis in Yemen and Saudi Arabia, which further underpins the safe-haven Greenback and supports the DXY.
The index holds a modest bullish bias above the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 38.2% Fibonacci retracement level of the September-October upswing. Moreover, the Moving Average Convergence Divergence (MACD) indicator shows the line hovering slightly positive, while the Relative Strength Index (RSI) near 50 suggests neutral but steady momentum.
The technical setup hints that the DXY could continue grinding higher while the immediate support at the 38.2% retracement at 101.30, which aligns with the 200-period SMA on the 4-hour chart, holds. A convincing break below the said confluence support, however, would expose deeper Fibonacci floors at 100.78 and 100.27, with broader structural demand emerging toward 99.53 and 98.60.
On the topside, initial resistance is seen at the 23.6% Fibo. retracement at 101.93, followed by a stronger barrier at the cycle high anchor near 102.96. Some follow-through buying beyond the 103.00 mark will be seen as a fresh trigger for bullish traders and set the stage for the resumption of the prior well-established uptrend from the September monthly swing low.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
DXY 4-hour chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
