After touching 19-month highs at 103.08, US Dollar Index (DXY) pares gains

Earlier gains in the US Dollar Index have faded, with the index back near 102.80 after reaching a 19-month high of 103.08.
The US Dollar's advance is seen as being driven primarily by expectations of additional Fed tightening and a rebound in US equities.
With bulls eyeing 103.10 and 103.50, any US Dollar pullback is likely to be contained.

The US Dollar Index (DXY) remains in a broader uptrend despite surrendering its earlier daily gains and slipping below 103.00. Earlier in the session, it touched a fresh 19-month high of 103.08. Tracking the Greenback against a basket of six currencies, the DXY had climbed 1.20% over the preceding two days.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Stronger-than-anticipated price pressures in October have reinforced expectations of a December rate hike by the Federal Reserve (Fed), prompting speculative traders to increase their US Dollar long positions this week. A larger hike of 50 basis points remains a possibility.

Concerns over persistently high inflation, voiced by Fed speakers, have lent further support to the US Dollar. Public remarks from some of these officials are expected later on Thursday, when they are likely to reaffirm their hawkish position.

The recent gains in US equities and semiconductor stocks are another important driver of the USD's advance, according to Commerzbank analysts Dr. Henry Hao and Charlie Lay, who cite “renewed artificial intelligence optimism”.

Technical Analysis: Can the US Dollar Limit Its Pullback From Overbought Levels?

A modest bearish correction is visible on the four-hour DXY chart after Wednesday's advance stalled near 103.10, the 161.8% Fibonacci extension of the November 5-6 rally. Nevertheless, momentum indicators on the 4-hour charts retain a positive bias. The Relative Strength Index (14) has already moved below the overbought threshold of 70, while the Moving Average Convergence Divergence (MACD) indicator remains in positive territory, supporting the constructive outlook.

For now, declines have been held above 102.80. A break below that level would bring the late October and early November highs, between 102.40 and 102.50, into focus as the next downside target. On the upside, the horizontal barrier around 103.10 provides initial resistance, ahead of the 8 April 2025 high near 103.50.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Common Questions Answered

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes in a significant number of other countries, serving as their ‘de facto’ currency. No other currency is traded more widely: according to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world's reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar's value. To fulfil its twin mandates of price stability (controlling inflation) and full employment, the Fed relies primarily on changes to interest rates. If prices climb too rapidly and inflation exceeds its 2% target, the Fed raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a financial system that has become blocked. This unconventional policy is deployed when credit dries up because banks, fearing counterparty defaults, refuse to lend to one another. It is a last-resort measure when interest-rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. The process involves printing more Dollars to purchase US government bonds, mainly from financial institutions. A weaker US Dollar is the usual result.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

Usually supportive of the US Dollar, quantitative tightening (QT) reverses the QE process. Under QT, the Federal Reserve halts bond purchases from financial institutions and, as its existing bond holdings mature, does not reinvest the principal in new purchases.