The dollar index continues to rise as it outperforms other currencies. The index is already trading at highs several months after breaking through previous resistance levels. It jumped to over 96, its highest level since June 2020, breaking through the previous technical barrier of 94.50. As the bulls expect the two week rally to continue towards 98, the next barrier of 96.50 threatens to erode any gains made.
But as market analysts and traders watch the index, what exactly is the dollar index and what does it mean for everyday investors?
What is the dollar index?
Established in 1973, the US Dollar Index is used to measure the value of the US currency against the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona.
The euro represents nearly 57.6% of the basket, followed by the yen at 13.6%. The pound weighs 11.9%, the Canadian dollar 9.1%, the Swedish krona 4.2% and the Swiss franc 3.6%.
Why is the dollar index rising?
As the global economic recovery remains in motion due to fears of runaway inflation, the US dollar has become a safe and reliable bet for investors to park their money. The greenback also jumped on expectations of a more hawkish stance by the Federal Reserve, which may soon raise interest rates. Rising interest rates increase the value of dollar-linked assets such as treasury bills and yield bonds.
Banks like HSBC, Citibank and JPMorgan Chase have already forecast further gains for the US dollar.
Impact on other asset classes
As the value of the dollar rises, so does the value of all underlying dollar-related assets. These include stocks of US companies, treasury bills, US government bonds, currency bonds, and others.
In addition, for non-US economies, companies that export goods to the United States also see their valuation increase. Indeed, as these companies earn in dollars, they can exchange it for larger amounts of their local currencies. For example, IT and pharmaceutical companies in India benefit from a stronger dollar
For companies that import goods or raw materials from the United States, the reverse is true. As they have to spend more to get the same amount of material, their ratings drop.
Since the price of crude oil is also fixed against the dollar, a stronger dollar also means an increase in the cost of oil. For oil importers and Indian refineries, that means a higher bill when the dollar is stronger.
A stronger dollar also means that foreign institutional investors (FIIs) are less interested in investing in emerging markets, as their returns are diluted due to the dominance of the dollar.
(Edited by : Shoma bhattacharjee)