The USD had a strong week all around, showing a very strong beginning to what is traditionally seen as the new trading year. On Friday, the US dollar (US Dollar Index DXY) skyrocketed above its important 200-day SMA, peaking at about 98.85. This achievement is a major breakthrough in its recovery. After reaching a bottom of about 97.70 on December 24, the DXY shot up into a powerful bull run. It has since shot above the 99.00 level and broken above its key 200-day SMA.
Given a few major factors, the US Dollar has come back with a vengeance. The biggest factor in this regard is the latest US Nonfarm Payrolls (NFP) data that significantly supported its recovery. Many analysts are looking to the DXY as it approaches the resistance for a potential reversal. They especially focused on how it will respond to future economic indicators in this new economic paradigm.
Positive Weekly Performance
The US Dollar’s strong performance this week was further proof of its firmness in the face of shifting market tides. Following a difficult stretch going into late December, the DXY penetrated through the 99.00 threshold. Regardless of the specific drivers, this unexpected movement points to a broader change in market sentiment.
Indeed, the DXY’s reversal since its December lows has been remarkable. The currency recently cleared the key 200-day SMA. Traders are optimistic enough about the momentum change that it might pick up a lot more steam over the next weeks. The index’s rise to record heights is a reflection of that rebound few in the market expected just weeks ago.
In addition, the strength of this week’s performance has set the bar higher for further upward movement in the index. Bullish analysts off the DXY expect it to go further still. If so, it might try to cap the May 2025 sky at 101.97, a big milestone in its long-term fight back from the bottom.
Economic Indicators Supporting Recovery
A number of other economic indicators have helped provide an invaluable foundation for the US Dollar’s recent strength. The economy added 50,000 jobs in December, a bit less than market consensus but nonetheless showing the continuing strength of the US labor market. Average hourly earnings have increased, now up to an annualized 3.8%. That economic uplift plays a critical role in increasing consumer spending and fueling our economic recovery.
The unemployment rate made a comeback too, retreating to 4.4% in December. These indicators together form the bedrock of the US Dollar’s strength as they indicate resilience in the economy. This supportive economic backdrop has helped insulate the USD and helped it weather external pressures with more confidence.
Futures traders are processing the implications of this morning’s stronger labor market numbers. They are tracking future events that may influence trends moving forward. Looking ahead, next week’s US Consumer Price Index (CPI) inflation data is likely to be key for the Dollar. Barring any surprises, comments from Federal Reserve policymakers will almost certainly set the tone for interest rate expectations.
Geopolitical Factors and Market Sentiment
Even with continued geopolitical flareups around the world, the US Dollar reaction has been surprisingly subdued. Analysts point out that the underlying capital flows and market dynamics often drive currency movements. Considerations such as interest rates, forecasts of overall economic growth, and general risk sentiment are more important than geopolitical events.
Aside from the rebound from last month’s nadir, US 2-year yields put in a solid reestablishment of upward momentum over the past week. Investors are very bullish on the Fed’s monetary policy pivot. This change beyond other things reflects their confidence in the state of the economy as a whole. One especially important factor driving the dollar’s value is interest rates. Strengthening yields reinforce the idea that the US Dollar has more room to rise.
While external factors can create volatility in currency markets, traders remain focused on domestic economic indicators that offer clearer insights into future movements. How US monetary policy interacts with global economic developments will most certainly continue to influence the mood around the USD.