US Dollar Index looks firmer and clinches new 2022 highs near 109.50

• The index adds to Friday’s advance well north of 109.00.
• US 2y bond yields rose to new 5-year highs near 3.50%.
• Dallas Fed Manufacturing Index, FOMC’s L.Brainard next on tap.

The greenback, in terms of the US Dollar Index (DXY), advances further and prints fresh cycle highs near 109.50 at the beginning of the week, an area last traded back in September 2002.

US Dollar Index propped up by yields, Fed

The index trades in the positive territory for the second consecutive session and extends the Powell-led rebound well past the 109.00 hurdle on Monday.

Indeed, investors continue to adjust to the hawkish message from Chief Powell at the Jackson Hole event last Friday, which lent fresh legs to the dollar and sponsored extra gains in US yields, particularly in the short end of the curve.

The continuation of the aggressive stance from the Fed has been reinforced by Powell and markets now see a 75 bps rate hike as the most likely scenario for the Fed’s meeting in September. On this, CME Group’s FedWatch Tool sees that probability at around 75%, from around 47% a week ago.

In the US docket, the Dallas Fed Manufacturing gauge is due seconded by a couple of short-term auctions and the speech by Fed’s Vice-Chair L.Brainard (permanent voter, dove).

What to look for around USD

No changes to the firm bullish stance in the US Dollar Index (DXY) on Monday, which extends the bounce to nearly 20-year highs around 109.50.

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. This view was recently reinforced by Chair Powell’s speech at the Jackson Hole Symposium.

Extra volatility in the dollar, however, should not be ruled out considering the ongoing debate around the size of the September’s interest rate hike by the Federal Reserve.

Looking at the more 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: FHFA’s House Price Index, CB Consumer Confidence (Tuesday) – MBA Mortgage Applications, ADP Employment Change (Wednesday) – Initial Claims, Final Manufacturing PMI, ISM Manufacturing, Construction Spending (Thursday) – Nonfarm Payrolls, Unemployment Rate, Factory Orders (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation over a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

US Dollar Index relevant levels

Now, the index is advancing 0.39% at 109.25 and a break above 109.47 (2022 high July 15) would aim for 109.77 (monthly high September 2002) and then 110.00 (round level). On the other hand, the next support emerges at 107.58 (weekly low August 26) seconded by 106.37 (55-day SMA) and then 104.63 (monthly low August 10).