Dollar Surges to 2-Year Highs as Fed Pivot Bets Fade

The US Dollar Index (DXY) is trading at elevated levels, reaching 109.98, the highest since November 2022. This represents a significant surge of over 7% since October 2024. The index is currently consolidating around the 110.00 psychological barrier, a level not seen in over two years.

Factors Driving Dollar Strength

  1. Hawkish Fed Expectations: Markets are repositioning for a more restrictive Federal Reserve policy in 2025 following the recent strong US employment report. This has led to diminishing expectations for several interest rate cuts in 2025.
  2. Economic Data: Robust US services data, resilient retail sales figures, and an uptick in core inflation have supported the dollar’s advance.
  3. Safe Haven Inflows: Geopolitical risks and trade war fears are contributing to the dollar’s strength as a safe-haven currency.

Technical Analysis

The DXY is showing signs of potential consolidation:

  • The 110.00 level needs to be breached for the rally to continue higher.
  • The next significant upside level is 112.83, followed by 114.72.
  • Support levels are at 108.05 and 104.54.
  • The daily relative strength index (RSI) shows a minor bearish divergence, potentially signaling easing upward momentum.

Market Expectations

  • The CME FedWatch Tool projects a 97.3% chance that interest rates will remain unchanged at the January meeting.
  • Traders are reassessing their positions ahead of key economic releases and President-elect Donald Trump’s inauguration.

Outlook

While the dollar’s momentum remains strong, there are signs that a near-term correction or consolidation may occur. The CFTC’s Commitment of Traders report shows US dollar positioning versus G10 currencies at its highest since July 2024, suggesting possible overextension. However, the overall bullish bias remains intact, supported by the Fed’s hawkish shift and elevated US bond yields.