The US dollar soars as yields rise and commodities fall. Where to go for USD?

US Dollar, DXY, Yields, JPY, EUR, USD/CNY, AUD, CAD, NOK, NZD – Talking Points

  • The US dollar is at a 20-year high, but the DXY index lacks follow-through
  • Commodities and a block of related currencies were hit by the fallout
  • The USD hits multi-year highs against most currencies. Can DXY burst higher?

The US dollar surged on Monday and Tuesday as US nominal and real yields continued to climb. The strength of the ‘big dollar’ was most felt against commodities and their associated currencies.

Oddly, the DXY index, the most popular US dollar index, barely hit a new high at the start of the week. This is largely due to the fact that the euro and the Japanese yen have been relatively unscathed in the dollar blitz so far, but that may not last.

U.S. Dollar Index (DXY) vs. U.S. 10-Year Nominal and Real Yields

Chart vscreated in TradingView

The People’s Bank of China (PBOC) let the yuan weaken to its lowest level since November 2020 on Monday. USD/CNY is now approaching levels above 6.7300, well up from the 6.3600 seen 3 weeks ago.

The world’s second-largest economy has allowed its currency to depreciate, which could have further implications for regional dollar appreciation. Japanese officials’ willingness to lower USD/JPY may become less apparent.

Rising external yields are often associated with bouts of yen depreciation and the Bank of Japan’s desire to maintain control of the domestic yield curve could come under closer scrutiny. A rise in USD/JPY cannot be ruled out.

The USD traded at levels not seen since 2020 against the AUD, CAD, NZD and NOK – otherwise known as the “commodity bloc”.

These currencies are sensitive to fluctuations in risk appetite, as their underlying economies are seen as tied to global growth prospects due to their large commodity exports.

Energy, Industrial Metals, Precious Metals and Commodities (Agricultural) are all under pressure in this strengthening US Dollar cycle.

It should be noted, however, that the underlying supply issues for most of these products have not gone away. In particular, the war in Ukraine is ongoing and shows no sign of abating.

Technical Analysis of the US Dollar Index (DXY)

The U.S. dollar index hit a 20-year high in late April, but it hasn’t kept up and appears to be stagnating near the twin highs of January 2017 and March 2020.

The DXY Index is a US dollar index weighted by EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).

As noted above, the EUR and JPY haven’t lost that much ground against the USD lately, which may explain the DXY’s consolidation.

The recent high of 104.187 may offer resistance. A break under 10 days simple moving average (SMA) may indicate a turning point in the bullish momentum and support could be at last week‘s low at 102.352.

DXY INDEX CHART

Chart vscreated in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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