US Dollar Forecast: DXY Firms as Fed’s Cautious Stance and Rising Yields Pressure Gold

U.S. Dollar Index Firm as Fed Rate Outlook and Yields Support Strength

The U.S. Dollar Index (DXY) remained firm on Tuesday, consolidating gains after a robust rally fueled by stronger U.S. economic data and rising Treasury yields. Traders are balancing expectations for Federal Reserve policy easing next year with the Fed’s cautious stance, supporting dollar strength relative to the euro and gold.

At 14:56 GMT, the U.S. Dollar Index is trading 106.936, up 0.076 or +0.07%.

Fed’s Cautious Stance Lifts Dollar

The Federal Reserve is widely expected to hold rates steady at its upcoming meeting, with markets pricing in a 25-basis-point cut in early 2025. However, Fed Chair Jerome Powell’s likely hawkish tone and updated projections for the rate path could limit expectations for rapid easing. The CME FedWatch Tool currently reflects just a 17% chance of a January rate cut, suggesting the Fed may adopt a gradual approach as it assesses inflation risks and economic resilience.

The greenback’s resilience reflects the strength of recent U.S. economic data. The Atlanta Fed’s GDPNow model forecasts 3.3% growth for Q4, underpinned by strong consumer spending, as seen in November’s 0.7% rise in retail sales, exceeding forecasts. This solid performance continues to bolster U.S. yields, driving demand for the dollar.

Treasury Yields and Technical Support

U.S. Treasury yields climbed ahead of the Fed decision, with the 10-year yield rising to 4.407% and the 2-year yield at 4.266%. Elevated yields have kept dollar momentum intact, with the DXY holding key support levels at 105.42 and 105.61, while resistance looms near 107.06 and 108.07.

The 50-day moving average (105.27) and the 200-day moving average (104.19) continue to underpin the broader uptrend, with the index rallying over 6% from its October low of 100.15. A clear break above 108.07 could open the door for further upside, while any retreat below the 50-day average may trigger a pullback toward the 104.50–105.00 zone.

Euro and Gold Struggle as Dollar Strength Persists

The euro remains under pressure, trading at $1.0491, as the widening yield spread between U.S. and German bonds—now at 216 basis points—continues to weigh on the single currency. With European growth lagging, the euro has posted a 5% decline year-to-date against the dollar.

Gold remains similarly pressured, trading near $2,639.22 per ounce as rising U.S. yields erode its appeal. A hawkish Fed or a sustained rise in Treasury yields could push gold toward key support near $2,600, with further downside risk if the dollar extends its rally.

Market Outlook

The U.S. Dollar Index maintains a bullish outlook in the short term, supported by resilient U.S. economic data, rising Treasury yields, and a cautious Federal Reserve. A decisive break above 107.06 could retest the recent high at 108.07, while sustained support at 105.50 reinforces the current uptrend. Traders will watch Powell’s comments and upcoming inflation data for further direction, with the greenback poised to remain well-bid against major counterparts.

More Information in our Economic Calendar.