US Dollar Index flirts with nearly 2-decade highs north of 109.00

• The rally in the index remains unabated above 109.00.
• US yields lose some upside traction on turnaround Tuesday.
• Flash PMIs, New Home Sales next on tap in the US docket.

The greenback, when gauged by the US Dollar Index (DXY), extends the advance past the 109.00 mark and trades at shouting distance from cycle highs near 109.30 on Tuesday.

US Dollar Index targets 109.30, looks to data

The index advances for the fifth consecutive session on Tuesday and approaches cycle tops in the 109.30 region, an area last visited back in September 2002.

Expectations of further tightening by the Federal Reserve in the next months, unabated inflation and the march higher in US yields across the curve have been all lending support to the buck in past sessions and ahead of the key PCE release and Chief Powell’s speech at the Jackson Hole Symposium due at the end of the week.

In the US data space, advanced Manufacturing and Services PMIs for the current month are due later in the NA session seconded by New Home Sales and the weekly report by the American Petroleum Institute (API) on US crude oil inventories.

What to look for around USD

Hawkish rhetoric from Fed’s rate-setters coupled with deteriorating sentiment in the risk complex propels the index back above the 100.00 barrier, exposing at the same time a probable move to YTD peaks.

Bolstering the dollar’s strength appears the firm conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market.

DXY, in the meantime, is poised to suffer some extra volatility amidst investors’ repricing of the next move by the Federal Reserve, namely a 50 bps or 75 bps hike in September.

Looking at the macro scenario, the greenback appears propped up by the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: Flash PMIs, New Home Sales (Tuesday) – MBA Mortgage Applications, Durable Goods Orders, Pending Home Sales (Wednesday) – Jackson Hole Symposium, Advanced Q2 GDP Growth Rate, Initial Claims (Thursday) - Jackson Hole Symposium, PCE, Personal Income, Personal Spending, Fed Powell, Final Consumer Sentiment (Friday) - Jackson Hole Symposium (Saturday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict.

US Dollar Index relevant levels

Now, the index is gaining 0.13% at 109.09 and a breakout of 109.29 (2022 high July 15) would aim for 109.77 (monthly high September 2002) and then 110.00 (round level). On the other hand, immediate support comes at 106.02 (55-day SMA) followed by 104.63 (monthly low August 10) and then 104.28 (100-day SMA).