In recent months, the Dollar Index, which measures the U.S. currency against other major world reserve foreign exchange instruments, has been on the rise, reaching the 107 level. Several factors are contributing to the dollar index’s rally, but its future trajectory remains uncertain.

Interest Rates as a Key Driver

Interest rate differentials play a crucial role in currency values in the foreign exchange market. The Dollar Index measures the U.S. dollar against various currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona. The U.S. short-term Fed Funds Rate has seen a significant increase, rising from zero percent in March 2022 to 5.375% in October 2023. This notable uptick in interest rates tends to support a higher dollar index.

Geopolitical Factors

Geopolitical tensions around the world, including the Chinese-Russian alliance, the conflict in Ukraine, and the situation in Taiwan, have led to uncertainties and conflicts. Traditionally, such geopolitical risks have caused capital to flow into the U.S. dollar and the U.S. bond market as safe havens. However, the current geopolitical landscape is unprecedented and does not guarantee the same capital flows in the future.

Domestic U.S. Political Division: While international geopolitics remain turbulent, the domestic political landscape in the United States is marked by division. The recent firing of the Speaker of the House and ongoing political battles do not bode well for the dollar or the bond market, both of which rely on the full faith and credit of the U.S. government.

Support and Resistance Levels 

From a short-term perspective, the dollar index has broken out of a bearish trend that persisted from the September 2022 high. Support is seen at the previous resistance level of 104.70, with the next resistance at the November 2022 high of 113.15. While there is room for further dollar index appreciation, recent price action has turned slightly bearish above the 107 level.

UUP and UDN ETFs 

Investors seeking exposure to the dollar index can use the UUP and UDN ETFs, which track the index’s movements. UUP rises with the dollar index, while UDN gains when the dollar index falls. These ETFs offer a convenient way to participate in dollar index movements.

As the forex market reflects the ever-changing economic and geopolitical landscapes in October 2023, expect high price volatility in the dollar index in the coming weeks and months. The dollar’s path remains uncertain, with multiple factors influencing its direction.

Featured Image: Freepik

Please See Disclaimer