US Dollar Index – US debt towers are the biggest risk to the greenback

In order to measure the US dollar in a broad way with the most important currencies, one should pay attention to the “ US Dollar Index ” ( DXY ). The “ US Dollar Index ” has been around since 1973 – it was created by the Federal Reserve. Since November 20, 1985, the “ DXY ” has been tradable as a contract on the US futures exchange “ ICE US ” ( Intercontinental Exchange ).

The " US Dollar Index " is suitable for investors and traders and offers the opportunity to speculate with an enormous market breadth in the case of short positions against the US dollar or vice versa to profit from a further strengthening of the greenback with long positions. The market breadth results from the construct of the " US Dollar Index ", which is made up of a basket of the most important currencies traded on the foreign exchange market ( which are also reserve currencies ).

The euro (EUR) is the top dog with a share of 57.6 percent and occupies pole position, followed by the Japanese yen (JPY) with 13.6 percent, the British pound (GBP) with 11.9 percent, the Canadian dollar (CAD9) with 9.1 percent, the Swedish krona (SEK) with 4.2 percent and the Swiss franc (CHF) with 3.6 percent. These currencies therefore form an overall counterweight according to their respective index shares. In this way, the performance of the US dollar can be easily measured against the most important reserve currencies.

The “ DXY ” is calculated and published in real time on the “ ICE US ”, has a base of 100.00 index points, which dates back to January 3, 2000 and offers historical data back to January 4, 1971.

The last highs and lows of the US dollar index can also be used to identify the respective intermediate highs and lows. On September 28, 2022, the EUR/USD currency pair was at a long-term low of 0.95351. On July 18, 2023, EUR/USD formed an intermediate high at 1.12752. The highs in the US dollar index are therefore mostly the lows for EUR/USD and vice versa. 

The US dollar is currently profiting greatly from the political and economic incapacity of the Eurozone ( the Euro plays a significant role, accounting for 57.6 percent of the currency basket ) and, of course, from much higher interest rates. But not everything that glitters is gold in the USA either. Year after year, the US debt construct has been postponed again and again, for example by raising the US debt ceiling, by deciding on bipartisan bridge financing, but at the end of the day, this has only bought time. The interest rates or interest amounts alone that have to be paid in order to finance and refinance US debt are becoming ever larger.

The US federal government debt is anything but sustainable - the escalating debt is getting out of control. In the September 2024 quarter, the federal government's debt in relation to the nominal GDP of the USA was 123.1 percent. A further increase is also expected in relation to the December 2024 quarter. For comparison: only Italy (138.3%), Greece (160.0%), Singapore (173.0%) and Japan (217.4%) are significantly more over-indebted.

In the spring, the CBO (Congressional Budget Office) will publish its projections for the long-term period from 2025 to 2035. This will most likely show how the US debt continues to rise. US debt service is now one of the largest budget items. The US must therefore raise enormous sums every month to "service" its creditors. It's unthinkable if the first big check bounces.

As of the December 2024 report deadline, the CBO forecast U.S. GDP growth of 2.3 percent for 2024, 1.9 percent for 2025, and 1.8 percent for 2026. With growth rates below 2 percent, it will be difficult to keep debt sustainable and manage it.

This analysis is based on a daily chart of the CFD on the US Dollar Index March 2025 contract traded on ICE-US (symbol here in ActivTrader: USDIndMar25). In order to be able to define the targets of the bulls and bears more precisely, a Fibonacci analysis would be necessary. The respective Fibonacci retracements and Fibonacci projections can be generated with the web-based trading platform " ActivTrader " and could then be used to derive the targets for the top and bottom. 

Based on the price trend from the last relevant long-term intermediate high of September 28, 2022 of 114,740 to the multi-year low of July 18, 2023 of 99,210, the next resistances would be at the upside levels of 108,808 (0.618%), 111,075 (0.764%) and 114,740 (1.00%). The supports would be at the downside levels of 106,975 (0.50%), 105,142 (0.382%), 102,875 (0.236%) and 99,210 (0.00%). The three EMAs ( EMA50 in purple, EMA100 in blue and EMA200 in red ) were also added to the chart. 

On the upside, a price target area would be the 0.618 percent Fibonacci retracement of 108.808 (as the chart reveals, not far away). On the downside, a test of the 0.382 percent Fibonacci retracement of 105.142 would be possible. At the time of this analysis, the Relative Strength Index (RSI) is still in the neutral area at 64.69 points.

 Source: ActivTrader

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