How Long Will U.S. Dollar Index (DXY) Continue to Rise?

The US Dollar Index (DXY) continues its parabolic rise. While it increased by 3% this week, commentators are asking when and at what level the dominance of the US currency will end. The strong dollar translates into a weak performance of other global currencies, traditional markets, and cryptocurrencies.

The Federal Reserve (Fed) continues its policy of financial tightening alongside persistently high inflation in the United States (US). This month saw another interest rate hike – this time by 75 basis points. The Fed’s decisions and the global macroeconomic situation favor the appreciation of the US dollar and the DXY index, which expresses its strength.

The DXY measures the strength of the U.S. dollar against a basket of six major foreign currencies. Among them are the euro, the Swiss franc, the Japanese yen, the Canadian dollar, the British pound, and the Swedish krona.

For example, an index value of 120 suggests that the U.S. dollar has strengthened by 20% against a basket of currencies over a given period of time. In other words, if the DXY is going up, it means that the USD is gaining strength or value relative to other currencies.

DXY parabolic rise

The US dollar index has been experiencing a parabolic rise since May 2021. The exact shape of the parabolic support line (blue) is not known, as it already seemed to have been broken early last month.

This seemed possible after the DXY reached the resistance area at the 109 level. However, it then only corrected by 4% and bounced off the 105 area, turning it into support (S/R flip). A few weeks later, it reached the 109 level again and finally broke out of it strongly this week, forming a record 3% green candle (blue arrow).

This is the largest weekly increase since March 16, 2020, when the DXY fired up at the start of the COVID-19 pandemic (red arrow). It is worth mentioning that such a steep rise was then a peak signal, after which the DXY experienced a 13.5% correction, reaching a low at 89. This decline, which lasted for 284 days, was at the same time a catalyst for growth in the cryptocurrency market at the turn of 2020-2021.

Currently, we see that the DXY has reached another area of resistance in the 112-113 range. If it is broken through, the next major area of resistance is only at 120 (orange line). This resistance is marked by the macro peak of early 2002.

On the other hand, on the monthly chart, we see a long-term rising parallel channel. Within this pattern, the aforementioned parabola is a sharp transition from the channel’s support line to its resistance. The median of the channel – the basic support in case of a correction from the top of the pattern – is currently in the 103 area.

Technical indicators

On the US Dollar Index RSI weekly chart, a multi-stage bearish divergence was developing, stretching back to May 2022. However, this week it was partially negated (red arrow).

Despite this, the current RSI value in the overbought area is 76.42, while in July it was 76.58. Therefore, even in the face of a huge increase, the bearish divergence may still be valid.

Moreover, the BBWP (Bollinger Band Width Percentile) chart, which is a directionless measure of volatility, is rising again. It currently indicates 93.25% and is again close to its maximum, reached in May. This is an additional signal of the DXY’s very heated uptrend and may indicate an impending correction.

The parabolic rise of the DXY is the main determinant of the decline in the risk-on-asset markets, which include the crypto sector to the highest degree. The cryptocurrency community, which is aware of the negative long-term correlation between the DXY and BTC, is constantly watching and commenting on the movements of the US currency index.

In a tweet today, educator and YouTuber @coinbureau posted a chart of the DXY and stated:

“The single biggest threat to the global economy right now is dollar strength. $DXY is a wrecking ball that’s taking no prisoners.”

In a similar vein, @CryptoMichNL comments on the macroeconomic situation, high commodity prices, and the threat of recession. In his opinion, a change in Fed policy and a weakening of the dollar is already on the horizon:

“Means that we’ll end the policy on the FED soon and other currencies will strengthen against the Dollar. Crypto to go up.”

Finally, cryptocurrency trader @TraderLenny added his two cents, stating that the DXY chart reminds him of the days of altcoin’s exponential growth during the 2017 bull market. In a joking tone, he stated:

“The $DXY is trading like a 2017 altcoin that just got a new font on their website.”

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.