Is it safe to buy the US dollar index as it surges to 2020 highs?

The US dollar index (DXY) continued its bullish trend on Tuesday as investors waited for the upcoming consumer confidence data. It is trading at $101.82, which was the highest level since March 23rd, 2020. King dollar has risen by over 14% from the lowest level last since January 2021.

Federal Reserve and heightened risks

The DXY index surged as investors reflected on the rising risks in the financial market. There is the ongoing risk of the Covid-19 outbreak in China, the second-biggest economy in the world. The country’s government has ordered some lockdowns in cities like Shanghai and Beijing.

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The dollar index has risen sharply as worries about the European economy continues. Most analysts expect that the Eurozone economy will see a renewed slowdown because of the energy sector. There are risks that many countries will struggle to find alternative natural gas sources. This is notable since euro is the biggest part of the dollar index.

Further, the British pound, which is the second-biggest constituent, has struggled after the recent weak economic data from the UK. On Friday, data revealed that the UK retail sales tumbled in March. Statistics data by Gfk also revealed that consumer confidence declined to the lowest level since 2008. Therefore, there is a likelihood that the Bank of England (BOE) will take a strategic pause on hikes.

The US dollar index is also rising as the Federal Reserve vows to accelerate its interest rates hikes. The bank is expected to hike interest rates by 0.50% in May, June, and July.

The next key data to watch will be the US consumer confidence figure by the Conference Board. Analysts expect the data will show that confidence rose to 108 in April even as inflation rose. The US will also publish the latest new home sales data and durable goods orders.

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bullish trend in the past few months. In this period, the index has risen above the 25-day and 50-day moving averages. It has also moved above the ascending trendline shown in orange. Further, oscillators like the Relative Strength Index (RSI) and MACD have moved above the overbought level.

Therefore, the US dollar index will likely keep rising as investors target the key resistance at $102.50. A drop below the support at $100 will invalidate this view.