US Dollar Index: Bearish Outlook Lingers Near 103.50 Despite Recovery

On Wednesday, during the early European trading session, the US Dollar Index managed to regain some of its lost ground, climbing to around 103.50. This represented a 0.21% gain for the day. The index, which gauges the value of the US Dollar against a basket of six major world currencies, attracted buyers ahead of the Federal Reserve’s interest rate decision scheduled for later in the day. Market participants widely anticipated that the Fed would keep interest rates unchanged.

Focus on Fed’s New Economic Projections

Traders were closely eyeing the new economic projections set to be released by Fed officials. These projections were expected to offer insights into how policymakers perceived the potential impact of policies implemented by the Donald Trump administration. Any signals regarding future monetary policy direction could significantly influence the US Dollar’s performance in the coming days.

Technical Analysis Points to Bearish Outlook

From a technical perspective, the US Dollar Index maintained a bearish stance. It remained below the crucial 100 – day Exponential Moving Average (EMA) on the daily chart, indicating a downward – leaning trend. The 14 – day Relative Strength Index (RSI), positioned below the midline at approximately 31.15, further supported the bearish sentiment. This RSI reading suggested that sellers were in control in the near term.

Downside and Upside Targets

In the event of a continued downward movement, the low of March 18 at 103.20 served as the initial support level for the USD index. A more critical level to watch was 102.00, which was not only a psychological benchmark but also the lower limit of the Bollinger Band. If the index suffered extended losses, it could potentially drop to 100.53, the low recorded on August 28, 2024.

On the upside, the immediate resistance level for the US Dollar Index was at 104.10, which was the high reached on March 14. Beyond that, the next obstacle stood at 105.45, the high from November 6, 2024. A sustained buying spree above this level might trigger a rally towards 106.10, which coincided with the 100 – day EMA.

Understanding the US Dollar and Related Policies

What is the US Dollar: The US Dollar (USD) is the official currency of the United States. It also circulates as a de facto currency in many other countries alongside local currencies. It holds the title of the world’s most actively traded currency, with data from 2022 showing it accounts for over 88% of all global foreign exchange turnover, averaging $6.6 trillion in daily transactions. After World War II, it replaced the British Pound as the world’s reserve currency. Historically, the US Dollar was backed by gold until the Bretton Woods Agreement in 1971 abolished the Gold Standard.

How Fed Decisions Impact the US Dollar: Monetary policy, determined by the Federal Reserve (Fed), is the most crucial factor influencing the US Dollar’s value. The Fed has a dual mandate: ensuring price stability (controlling inflation) and promoting full employment. Its main instrument for achieving these goals is adjusting interest rates. When inflation rises above the Fed’s 2% target, the Fed hikes rates, which strengthens the USD. Conversely, if inflation drops below 2% or the unemployment rate is too high, the Fed may lower rates, causing the USD to weaken.

Quantitative Easing and Its Influence: In extreme economic situations, the Fed can resort to quantitative easing (QE). This involves printing more dollars and using them to purchase US government bonds, mainly from financial institutions. QE aims to increase the flow of credit in a stagnant financial system when banks are reluctant to lend due to counterparty default fears. It was a key measure during the 2008 Great Financial Crisis. Generally, QE leads to a weaker US Dollar.

Quantitative Tightening and Its Impact: Quantitative tightening (QT) is the opposite of QE. The Fed stops buying bonds from financial institutions and does not reinvest the principal from maturing bonds into new purchases. This policy is typically favorable for the US Dollar as it reduces the money supply in the market.