The US dollar index (DXY) continued soaring this week as it approached the important resistance point at $110. It is on track for its fifth consecutive week of gains and is nearing the highest level since November 2022. It has jumped by over 9% from its lowest level in 2024.
US dollar index is soaring
The US dollar index is charging, helped by the ongoing robustness of the American economy, which is doing better than most.
Estimates are that the US economy grew by 2.7% in 2024, avoiding the much-talked-about recession. Economists expect the economy will grow by 2.5% this year, a move that will make it over 12% bigger than during the pandemic.
The US performance is significantly different from other countries in Asia and Europe. In China, the economy has deteriorated, pushing the central bank to consider cutting interest rates. In a statement to the Financial Times, the central bank said that it would slash rates from 1.5% today later this year.
The bank will put more emphasis on the role of interest rates adjustments, moving away from quantitative objectives.
Europe is not doing well, either. Economists expect that Europe’s economy either remained stagnant in 2024 or shrunk slightly last year. What is clear, though, is that the German economy has not grown in the last few years.
Several large companies that support the German economy are in trouble and have been forced to slash workers. For example, BASF, the biggest chemical company in the world, made big layoffs and expanded in China.
Volkswagen considered shutting down three plants in Germany in 2024. The company has reached a deal to maintain those locations for now as it finds other ways to slash over $4 billion in annual costs.
France is also not doing well as economies in key countries affect some of its top exports. For example, China’s weakness has reduced demand of its luxury products like LVMH and Gucci.
The same trend is happening in the UK, where growth has been sluggish in the past few years.
Central bank divergences
Therefore, the US dollar index has surged as investors anticipate a potential divergence between the Federal Reserve and other central banks.
The Fed has already hinted that it will deliver just two interest rate cuts this year, down from the previous guidance of four.
In Europe, the European Central Bank (ECB) is expected to push rates to near zero this year in a bid to lower access to capital. The Bank of England, which has been more conservative, is also expected to be more aggressive this year.
The actions of the ECB and the BoE are important because the euro and sterling are the biggest part of the US dollar index. Indeed, the EUR/USD pair has crashed to 1.0275 as it risks moving down to parity. The GBP/USD pair has fallen to 1.2400.
Other currencies in the DXY index like the Swiss franc, Japanese yen, and Swedish krona have also plunged hard this year.
DXY index analysis
The weekly chart shows that the US dollar index continued its strong uptrend this week. It has now rallied for five consecutive weeks and crossed the important resistance point at 107.23.
The index has moved above the important resistance level at 108.65, the highest swing on October 2 and the neckline of the double-bottom at $100. It has also jumped above the 23.6% Fibonacci Retracement level.
The DXY index has remained above the 50-week and 100-week moving averages. Therefore, the greenback will likely continue soaring as investors target the 2022 high of $114.65, about 5.13% above the current level.
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