US Dollar Index challenges monthly lows near 89.70

The greenback, when tracked by the US Dollar Index (DXY), remains on the defensive and trades closer to the monthly lows in the 89.70 region on turnaround Tuesday.

US Dollar Index depressed near 89.70

The index extends the pessimism seen at the beginning of the week and flirts with the area of monthly lows around 89.70 amidst investors’ preference for the riskier assets and steady US yields.

In fact, yields of the US 10-year note keep treading water around 1.60% after Monday’s drop to 2-week lows near 1.59%.

In the meantime, the view of transient higher inflation in the upcoming months appears to be gathering traction among market participants, particularly following recent confirmation of this stance by FOMC officials.

On the latter, FOMC L.Brainard suggested the Fed has the tools to bring inflation back to the central bank’s target in case consumer prices threaten impact on longer-term inflation expectations. Still on the Fed’s front, KC Fed E.George deemed any tapering talk as premature for the time being.

On Tuesday’s US calendar, the Conference Board will publish its Consumer Confidence gauge seconded by the Housing Price Index, the S&P/Case-Shiller Index, New Home Sales and the testimony by FOMC’s R.Quarles.

What to look for around USD

The index remains under pressure and challenges once again the 89.70 region. Looking at the broader scenario, the negative stance on the dollar seems to prevail among market participants, as speculation of higher inflation in the medium-term now looks to have lost momentum and the US economic outperformance narrative looks almost fully priced in. Bolstering the bearish view on the buck emerges further confirmation of the Fed’s mega-accommodative stance for the foreseeable future, as per recent FOMC Minutes and Fed-speakers.

Key events in the US this week: CB’s Consumer Confidence, New Home Sales (Tuesday) – Flash Q1 GDP, Initial Claims, Durable Goods Orders (Thursday) – Core PCE, Personal Income/Spending, final U-Mich Index (Friday).

Eminent issues on the back boiler: Biden’s plans to support infrastructure and families, worth nearly $4 trillion. US-China trade conflict under the Biden’s administration. Tapering speculation vs. economic recovery. US real interest rates vs. Europe. Could US fiscal stimulus lead to overheating?

US Dollar Index relevant levels

Now, the index is losing 0.10% at 89.75 and faces the next support at 89.65 (monthly low May 21) followed by 89.20 (2021 low Jan.6) and then 88.94 (monthly low March 2018). On the other hand, a breakout of 90.90 (weekly high May 11) would open the door to 91.07 (100-day SMA) and finally 91.43 (monthly high May 5).