US Dollar Forecast: Bullish DXY Outlook as Treasury Yields Climb, Gold Prices Slip

U.S. Dollar Index Surges as Treasury Yields Climb

The U.S. Dollar Index (DXY) rose sharply on Wednesday, reaching an intraday high of 104.570, with traders eyeing a potential breakout above the July 30 peak of 104.799. If momentum holds, the index could target the major resistance level of 106.130, last seen on June 26. Support is anchored at the 200-day moving average of 103.799, followed by a pivot at 103.144.

At 14:03 GMT, the U.S. Dollar Index (DXY) is trading 104.459, up 0.397 or +0.38%.

Rate Cut Expectations Shift, Boosting Dollar

The dollar’s strength is largely driven by shifting market expectations for Federal Reserve rate cuts. Recent upbeat economic data has pushed traders to price in a more gradual pace of rate reductions. The probability of a 25-basis-point cut in November has surged to 91%, according to the CME FedWatch tool, whereas a month ago, the market was split between a 25 and 50 bps cut. This more moderate outlook has lifted U.S. Treasury yields, with the 10-year yield climbing to 4.24%, its highest since late July.

The rise in yields is pressuring risk assets, as seen in U.S. stock futures falling after the S&P 500 posted back-to-back losses. Meanwhile, the Japanese yen dropped to 152 per dollar, a level not seen since July 31, as higher U.S. yields continue to drive demand for the greenback.

Impact on Gold: Profit-Taking Likely

Higher Treasury yields and a stronger dollar are weighing on gold prices. After hitting an all-time high of $2,758.53 earlier in the week, gold fell back to $2,738.04 on Wednesday, potentially signaling early profit-taking. While this move doesn’t indicate a change in the broader uptrend, it could lead to a short-term pullback as traders lock in gains from recent rallies. The strong dollar and elevated yields create headwinds for gold, which typically moves inversely to both.

U.S. Election Adds to Dollar Volatility

The U.S. presidential election is adding a layer of uncertainty, further boosting the dollar. The possibility of a Republican win, particularly a Trump victory, is seen as bullish for the greenback. A recent Reuters/Ipsos poll shows a tight race, with Vice President Kamala Harris holding a slim 46% to 43% lead over Trump. Analysts suggest a Republican sweep could drive further dollar gains, but there is still time for market repricing. If the outlook shifts toward a Harris win, the dollar could see a pullback, as her policies are perceived to be less inflationary.

Treasury Yields and Fed Commentary in Focus

U.S. Treasury yields have been on the rise this week, supported by robust economic data and concerns about the federal deficit. Despite a half-point rate cut in September, the Fed has become more cautious about additional cuts for the rest of 2024. Traders will be closely watching Fed commentary from officials like Governor Michelle Bowman and Richmond Fed President Thomas Barkin for further insight into the central bank’s next moves. The Fed’s Beige Book report, released on Wednesday, could also offer important clues about the health of the U.S. economy.

Market Forecast: Bullish Dollar Outlook

With U.S. Treasury yields climbing, solid economic data, and election-driven uncertainty, the U.S. Dollar Index appears positioned for further upside in the near term. A breakout above the 104.799 level could lead to a test of the June peak at 106.130. However, traders should be cautious of potential pullbacks, particularly if profit-taking emerges or if the Fed signals a more dovish stance. Key levels to watch include support at 103.799 and the 10-year yield trajectory, which will play a crucial role in guiding the dollar’s next move.