DXY: US dollar index prediction as the yield curve inverts

The US dollar index is approaching $100 as investors weigh the ongoing risks in the market and the extremely aggressive Federal Reserve. DXY is trading at $99.70, which is about 12% above the lowest level in 2021. This price is also the highest it has been since May 27, 2020.

Fed minutes ahead

The dollar index is rising as risks on Russia keep rising. The European Union has announced that it will boost its sanctions on Russia as the world sees the horror inflicted in Ukraine. Some of the sanctions expected on Wednesday are on coal and high-profile Russian citizens. 

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Therefore, the US dollar tends to do well in a period of escalating risks globally. For now, it is unclear whether Russia will retaliate by ending exports of natural gas to Europe.

The dollar index is also holding steady as investors reflect on the ongoing inversion of the yield curve. As shown below, the yield curve has inverted for the first time since 2019. The spread between the 10-year and 2-year bond yields has dropped to the lowest level since 2007.

This performance of the yield curve simply means that investors are asking for better returns for short-term government bonds than longer ones. In a normal market, investors ask for a better return for long-term bonds.

Therefore, analysts expect that the economy will go through a recession in the coming months or years. That’s because the yield curve has been the best predictor of recessions.

The dollar index has also risen ahead of the FOMC minutes that are expected later today. The minutes come at a time when most officials of the committee have talked about the need to hike interest rates by 0.50%. On Tuesday, Lael Brainard, a senior official, said that the bank will likely start quantitative tightening.

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bullish trend in the past few months. Along the way, the index has formed an ascending channel that is shown in green. It has moved above the 25-day and 50-day moving average while the Relative Strength Index has been rising. 

The US dollar index is also approaching the upper side of the channel. Therefore, there is a likelihood that it will keep rising as bulls target the key resistance at $100.