US Dollar Index Flying High on Safe-Haven Buying
The US Dollar Index has reached yet another 20-year milestone as the relentless greenback steamrolls everything in its path.
Another, another dollar rally. At the time of writing, the dollar index basket (DXY) is trading at 110.16, just below it’s highest level since June 2002. The move higher comes as the Euro sinks following Gazprom’s decision to shutter gas exports to the region. Citing an oil leak, the majority Russian state-owned energy supplier announced plans to shutdown the Nord Stream 1 pipeline indefinitely.
Coincidently, the shutdown comes just hours after G7 nations agreed to impose price caps on Russian oil. The pipeline is the largest delivery method of Russian gas to Europe. Subsequently, the closure, is likely to have catastrophic effects on the bloc’s economy. As a result, the US dollar is seeing strong safe-haven buying from the region.
Another factor helping the dollar is the worsening covid situation in China. It was revealed this morning that Shenzhen districts will restrict it’s citizens movements in a bid to contain a new viral outbreak. Separately, Chengdu, which imposed strict controls on its 21 million residents last week, has extended the lockdowns further. As such, almost 65 million Chinese residents are affected.
What next for the Dollar?
The monthly price chart shows the dollar rally kicked into overdrive when the Federal Reserve Open Market Committee (FOMC) began raising rates at the end of last year. The basket has gained more than 20% in that time. With much of the gains coming against the Euro, British Pound and Japanese yen.
Presently, the US dollar index is pulling clear of the previous resistance offered by the 2016 high at 103.80, which now becomes long-term support. Looking forward, an extended rally could target the 2002 high at 121.00.
However, the rate of ascent is almost vertical. Subsequently, the long term Relative Strength Index (RSI) has reached nose-bleed territory. It’s current reading 77.90 is way above the 70.00 level which implies an asset is technically overbought. Regardless of the stretched RSI, the fundamental backdrop supports a stronger US dollar in the near-term. For this reason, the immediate outlook is positive. However, considering just how far the dollar has come this year, a reversal can’t be ruled.
With this in mind, a close below the 2016 high of 103.80 negates the bullish view.
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