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Wednesday, November 25, 2020

US dollar index on track for its best month since April

  • The US dollar index has risen by more than 2% in September, its first positive month since April.
  • The increase is mostly because of the political risks as the US heads to elections.
  • The rising number of Covid-19 cases in other countries has also contributed.

The US dollar index (DXY) is on track to end its first month in the green since April. The index is trading at $94.09, which is the highest it has been since July.

Dollar index
US dollar index has gained 2% in September

Fundamental analysis: Why the dollar rose in September

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The US dollar index rose in September partly because of the rising geopolitical risks between the US and China. During the month, Donald Trump announced that the US would ban TikTok and WeChat from the country. As this happened, some American companies like Microsoft and Oracle announced their interest in acquiring the company.

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At the same time, the US placed Semiconductor Manufacturing International Corporation (SMIC) into an Entity List. That means that US firms would need permission to sell products to the company. While China has not retaliated, media reports said that the country has created an Entity list and is waiting for the outcome of the election.

The US dollar index also rose because of the upcoming general election. With most cities experiencing violence, there is a possibility that the election will be contested. Worse, Donald Trump has refused to confirm whether he will concede defeat if he loses. All these issues risk more political violence at a time when the US is facing its worst recession in decades.

Meanwhile, the rising number of Covid-19 cases in some European countries was a positive thing for the dollar index. In September, countries like Spain and the United Kingdom confirmed thousands of new cases. Indeed, the UK government announced some restrictions to halt the disease from spreading. As we saw in March, rising number of cases in other countries is usually positive for the dollar index.

The dollar index also rose because of the differences in Washington. In recent months, the White House, House of Representatives, and the Senate have differed on another stimulus package. Democrats have proposed a $2.2 trillion package, a move the White House and Republicans have rejected. With divisions rising, there is a probability that the US will not receive a stimulus until after the election. This is a challenge because recent data has shown that the US economy is starting to slow.

In total, the US dollar rose by more than 1.70% against the euro, 4% against the sterling, and by 3.50% against the Swedish krona. It also rose by 1.4% against the Swiss franc.

US dollar index technical analysis

dollar index
US dollar index technical chart

The weekly chart shows that the US dollar index has been in an upward trend after reaching a low of $91.67 on September 1. Today, the index is trading at $94.08, which is slightly below the 38.6% Fibonacci retracement level. Also, the price is along the 15-day exponential moving average. But it is below the 25-day EMA.

Therefore, I suspect that the pair will continue rising in October as bulls attempt to test the next resistance at $96.00, which is along the 50% retracement. On the flip side, a move below September’s low will invalidate this trend.

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