Société Générale: U.S. Dollar Index to rebound to record high of 114.8

Analysts at Société Générale have predicted that the U.S. Dollar Index (DXY) will rebound to a record high since 2001 at 114.8 in the coming days after following dips.

“Only if the support zone at 110.00/109.30 gets violated would there be a risk of a deeper pullback,” SocGen reported. “In such a scenario, [the] next objective could be at [the] September low of 107.60. Daily RSI is still within bullish territory denoting prevalence of upward momentum.”

The DXY measures the dollar against six major currencies—the euro, the sterling, the yen, the Canadian dollar, the Swedish krona and the Swiss franc. The index was introduced by former U.S. president Richard Nixon in 1973 following the removal of the gold standard and the dissolution of the Bretton Woods Agreement. It began with a base of 100 and reached its all-time high of 160.41 in 1985.

This basket of currencies does not have an even distribution. The euro constitutes 57.6 percent of the basket, followed by 13.6 percent of the yen. Meanwhile, the other currencies share the rest percentage. This composition allows stakeholders to fairly evaluate the strength of the U.S. dollar against the currencies.

Based on five-day metrics, the euro declined 2.39 percent against the U.S. currency, the sterling was down 3.19 percent and the yen slipped 1.02 percent. Last weekend, gold went down 1.04 percent, while silver was down 2.47 percent against the greenback.

Effects of strong dollar on economy

As one of the largest currencies, the U.S. dollar greatly influences the global economy. The stock market closed lower last week, with the Dow Jones composite falling 2.05 percent, S&P 500 slipping 2.8 percent, Nasdaq going down 3.8 percent and NYSE declining by 3.34 percent. The U.S. stock market lost more than a trillion U.S. dollars on Friday.

This year, crypto was negatively affected by the dollar’s increasing strength. 3iQ Corp. head of research Mark Conners said that the greenback’s high value had pulled “other assets away from currencies.” Nevertheless, the global crypto market capitalization strengthened by 0.08 percent last Sunday, closing at $944.60 billion.

Consumers within the U.S. were affected negatively as the prices of necessities soared. The August consumer price index (CPI) revealed that the purchasing power of U.S. citizens had decreased by 11.4 percent against food, 6.2 percent against housing and 25.6 percent against gasoline for the same amount of money in 2021. The situation does not apply to people holding U.S dollars abroad, as paying with the greenback gives higher purchasing power.

Comerica Wealth Management CIO John Lynch explained how the dollar’s strength put pressure on other economies. He said, “Dollar strength equates to global currency weakness, fanning inflationary pressures around the world."

“Consequently, central banks in developed and emerging economies are confronted with the conflicting necessity to raise interest rates to fight inflation and support their currencies, despite weakening economic growth."

The United Nations has demanded the Federal Reserve and other central banks slow down interest rate hikes, the main contributing factor to the greenback’s surge. However, the Fed said it would keep its tight fiscal policy to tame inflation within the country.