US Dollar (DXY): Climbs to 5-Week High Amid Inflation, Global Growth Concerns

DXY Highlights

• US dollar reaches highest level in five weeks on inflation concerns
• Dollar index could hit 104 by June
• Rise in US Treasury yields contribute to the dollar’s strength

DXY Overview

The US dollar climbed to its highest level in five weeks against other major currencies on Monday. This increase in value was driven by concerns about inflation in the US and global economic growth.

The dollar had already gained significantly last week, and it continued to rise, reaching a level not seen since April 10. Although it slightly dipped later, it still remains strong.

In fact, it gained 1.4% over the past week. Traders believe that the dollar is undervalued and expect the dollar index, which measures its value against other major currencies, to reach 104 by the end of June.

At 05:51 GMT, June U.S. Dollar Index futures are trading 102.430, down 0.079 or -0.08%. This is down from an intraday high of 102.585. On Friday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.10, up $0.18 or +0.63%.

DXY Gains Strength, Inflation Worries Rise

One of the reasons for the dollar’s strength is the increase in US Treasury yields. A recent survey revealed that long-term inflation expectations among US consumers are the highest they have been in 12 years.

This raises the possibility of the Federal Reserve raising interest rates next month. Additionally, US consumer sentiment has dropped to a six-month low in May due to concerns that political debates over increasing the federal government’s borrowing limit could lead to a recession. These factors have contributed to the positive outlook for the US dollar.

Inflation Expectations Rise, Sentiment Drops

The University of Michigan’s survey on Friday revealed concerning trends for the Federal Reserve. Consumers’ long-term inflation expectations reached their highest level since 2011, contradicting the Fed’s recent indication of a potential pause in their aggressive monetary tightening cycle.

The survey also showed a decline in overall consumer sentiment, with a preliminary reading of 57.7, the lowest since November and down from 63.5 in April (below economists’ forecast of 63.0). The survey’s measures of current economic conditions and consumer expectations also experienced drops.

Inflation Outlook: Rise Raises Rate Hike Odds

In terms of inflation expectations, the survey indicated a slight dip in one-year expectations from 4.6% to 4.5% this month. However, the five-year inflation outlook rose to 3.2%, the highest since 2011, from 3.0% in the previous month.

This surge in inflation expectations has led to increased odds of a rate hike by the Federal Reserve, with traders currently estimating a 13% chance compared to close to zero prior to the survey. Nonetheless, the market still prices in the possibility of up to three quarter-point rate cuts by the end of the year.

Technical Analysis

The main trend is up. The trend turned up on Friday when buyers took out 102.185. It was reaffirmed earlier today when the buying extended past 102.480. A trade through 100.520 (S3) will change the main trend to down.

An extended rally through 102.405 (S1) will indicate the buying is getting stronger with the next major target coming in at 103.631 (R3).