US DOLLAR INDEX (DXY) HITS 2 YEARS HIGH: REFLECTING STRENGTH OR SIGNALING RISK?

The US Dollar Index (DXY) surged on Tuesday, recording a +0.29% gain and hitting a two-year high. This surge has caught the attention of global investors, raising the question of whether the strength of the USD will persist or if it is simply a temporary reaction to economic and geopolitical fluctuations.

DXY's Strong Gains

1. Fed's Monetary Policy: 

The US Federal Reserve (Fed) has maintained a hawkish stance on controlling inflation, with the possibility of keeping interest rates higher for an extended period. This has pushed US government bond yields to high levels, increasing the attractiveness of the USD compared to other currencies.

The Fed's interest rate decisions significantly affect the financial market.

 According to a recent statement by Fed Chairman Jerome Powell, the US economy remains "resilient" in the face of global economic pressures, which further supports the rise of the greenback.

2. Weakening of Other Currencies: 

The Euro is under pressure from weak economic data in the Eurozone, especially in Germany, the region’s largest economy. In addition, the Japanese Yen continues to decline as the Bank of Japan maintains negative interest rates and injects economic stimulus.

3. Geopolitics and Safe Haven Demand:

 Conflicts in the Middle East and US-China trade tensions have led investors to seek the USD as a safe haven. Commodity markets such as oil and gold are also affected by the USD's appreciation, causing downward pressure on prices.

DXY developments are shown in the chart

Impact of DXY Peaking

For the Global Economy: Many developing countries that borrow in USD will face a greater financial burden due to the strong USD. Additionally, US exports will become more expensive, and US goods may lose competitiveness in the international market, putting pressure on exporting businesses.

For Commodity Prices: Oil, gold, and other commodities are often weighed down by a strong USD, reducing their attractiveness to investors using other foreign currencies. In addition, due to these market conditions, Brent oil prices have fallen to near the support level of $70/barrel.

For Financial Markets: Capital flows are tending to withdraw from emerging markets and return to the US, which risks diminishing foreign investment in these countries.

Components that make up the DXY index

What Forecasts and Warnings Does the Increase in DXY Bring?

Despite the strong DXY, some analysts warn that a strong USD could backfire:

Fed's Potential Rate Adjustments: An overly strong USD could dampen domestic demand, forcing the Fed to become more flexible in its next policy decisions.

Impact on Global Growth: Many international organizations, including the IMF, have warned that the strength of the USD could exacerbate the economic gap between rich and poor countries.

The DXY hitting a two-year high symbolizes the strength of the US economy, but it also signals potential long-term challenges for the global economy. With unpredictable fluctuations in monetary policy and geopolitics, this is not only a time to observe, but also a time for investors to act cautiously and strategically.