US Dollar Forecast: Bearish DXY and Rising Gold Reserves Signal Eroding Confidence

Dollar Index Slips as Fiscal, Fed, and Geopolitical Pressures Mount

The U.S. Dollar Index’s fall below the May 6 support at 99.172 has intensified bearish sentiment, signaling deeper structural concerns beyond technical patterns. Traders now eye the 97.921 region, with momentum favoring continued downside unless a short-covering rebound lifts the index above resistance at 99.949. The breach aligns with Moody’s downgrade of the U.S. credit rating to Aa1, highlighting the market’s growing discomfort with Washington’s $2 trillion-plus deficits and soaring debt service costs.

Federal Reserve Governor Christopher Waller’s recent remarks underline the issue, warning that current fiscal trends are “just not sustainable.” The bond market is reacting accordingly, with long-end Treasury yields pushing above 5.0%—a clear signal of investor demand for greater compensation against perceived U.S. credit risk.

At 14:48 GMT, the U.S. Dollar Index is trading 99.008, down 0.096 or -0.10%.

Federal Reserve’s Rate Cut Outlook Hinges on Tariff Policy

The Fed’s monetary path is increasingly tethered to fiscal and trade decisions. Waller outlined that a potential rate-cut scenario remains viable only if tariffs can be reduced to around 10% and finalized by mid-year. Otherwise, the inflationary risks of aggressive trade measures could derail any dovish pivot.

Markets currently price in modest easing expectations, but the conditional nature of those bets reflects skepticism about Washington’s ability to coordinate policies effectively. Rising tariffs could pressure prices and weaken growth simultaneously, a stagflation risk that would constrain Fed flexibility despite the 4.25%-4.50% current fed funds target range.

Fiscal Drift Spurs “Risk-Off” Sentiment Toward U.S. Assets

The federal government’s lack of fiscal restraint continues to sour market sentiment. Bond yields are climbing not only on inflation fears but also from growing uncertainty about U.S. debt sustainability. Republican budget initiatives are expected to push borrowing even higher, exacerbating concerns about long-term solvency.

With interest payments now consuming a significant share of federal outlays, markets are demanding a higher premium to hold U.S. debt. This feedback loop—rising debt leading to higher yields and thus even greater debt service costs—raises the stakes for fiscal consolidation.

Gold’s Safe Haven Role Expands as Dollar Confidence Wanes

Gold’s appeal is gaining traction among central banks and institutional investors seeking alternatives to the dollar’s dominance. The ECB’s Financial Stability Report notes gold’s value as a reliable store during financial or geopolitical stress. Annual central bank gold purchases now exceed 1,000 tonnes, reinforcing its role in reserve diversification strategies.

Market Outlook: Dollar Faces Structural Headwinds

The DXY remains under pressure as fiscal concerns, Fed uncertainty, and geopolitical risk converge. Unless Washington delivers credible deficit reduction and trade clarity, the dollar’s technical weakness may extend. Traders should monitor gold’s performance and bond yield spreads for leading signals on broader dollar sentiment.

More Information in our Economic Calendar.