US Dollar Analysis: Euro and Gold Drop Sharply as Inflation Risks Support DXY

Why Is the Dollar Testing a One-Year High?

The U.S. Dollar Index (DXY) surged to a one-year peak of 107.064 this week, driven by diminishing expectations for Federal Reserve rate cuts and speculation over inflationary pressures tied to President-elect Donald Trump’s economic policies. The index is up about 1.8% for the week, marking its strongest performance since September.

At 15:14 GMT, the U.S. Dollar Index is trading 106.813, down 0.054 or -0.05%.

What Did Powell Say About Rate Cuts?

Federal Reserve Chair Jerome Powell stressed a cautious approach, stating there is no immediate need to lower interest rates. Citing steady economic growth, a robust labor market, and sticky inflation, Powell’s remarks led traders to reduce bets on a December rate cut. Market odds for a 25-basis-point reduction fell to 60%, down from 82% earlier this week, as per CME’s FedWatch tool.

Fiona Cincotta, a strategist at City Index, highlighted the shift in sentiment: “The market is now bracing for fewer rate cuts next year as the Fed balances risks tied to potential inflation under Trump’s proposed policies.”

How Is Dollar Strength Impacting Other Markets?

The dollar’s rally has put pressure on gold, currencies, and even cryptocurrencies. Gold prices are down over 4% this week to $2,568.37 per ounce, their worst weekly decline in three years. Rising U.S. interest rate expectations have made non-yielding assets like gold less attractive.

In currency markets, the euro dropped to $1.05647, losing 1.4% for the week, while the pound slid 2% to $1.2671, marking its steepest weekly decline since January. The yen weakened past 156 per dollar before recovering slightly to 155.575, raising concerns of intervention from Japanese authorities.

Could Trump’s Policies Fuel Inflation Risks?

Investors are weighing the inflationary potential of Trump’s fiscal and trade policies, which could delay future Fed rate cuts. Tariffs and government spending under Trump’s administration are expected to drive price increases, supporting the dollar further and creating headwinds for rival currencies and commodities.

What’s Next for the Dollar?

The dollar’s bullish trend is likely to persist as traders focus on inflation risks and a less dovish Fed stance. The DXY could test new highs in the near term, with ongoing pressure on gold and global currencies. Market participants should also monitor potential yen intervention and further updates on Trump’s economic policies as key factors shaping dollar strength.