Beware of dollar index volatility

The U.S. dollar is on a tear amid expectations that the Federal Reserve will hike interest rates later this year against a backdrop of easing in many of the world’s economies, but charts suggest the potential for volatility before the greenback consolidates those gains.

The U.S. dollar Index, which measures dollar’s value against a basket of foreign currencies – the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona and the Swiss franc – has risen 25 percent from $ 0.80 in July 2014 to above $ 1.00 this week. Changes in the dollar index have a large impact on U.S. trading partners, such as China, Mexico, South Korea and Brazil, but these currencies are not included in the dollar index calculation.

A 25 percent rise is unusually large, so some analysts think the dollar index will stabilize around $ 1.00. Chart analysis suggests there are four key questions. This analysis is best seen on a monthly chart where each candle represents one month of dollar index activity.

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