US Dollar Forecast: DXY Holds Firm Near 2-Year High as Fed Signals Fewer 2025 Cuts

U.S. Dollar Index Holds Firm Near Two-Year High as Fed Signals Fewer Cuts in 2025

The U.S. Dollar Index (DXY) closed the week at 107.815, posting a 0.81% gain as the Federal Reserve’s hawkish outlook and solid economic data bolstered sentiment. This follows the Fed’s quarter-point rate cut on Wednesday and a notable shift in projections, reducing expected rate cuts for 2025—a clear signal of the central bank’s inflation-first approach.

Fed Maintains Cautious Easing Path

While the Fed opted for a rate reduction, policymakers made it clear that inflation remains sufficiently stubborn to warrant a slower, more deliberate path to easing. The revised dot plot now reflects just 50 basis points of cuts for 2025, halving prior expectations. Chair Jerome Powell underscored the Fed’s intent to keep rates elevated until inflation shows more definitive signs of returning to the 2% target.

The latest data supported the Fed’s position. The personal consumption expenditures (PCE) price index rose 0.1% in November, down from 0.2% in October, with annualized inflation at 2.4%. While cooling, inflation remains above the Fed’s comfort zone. This prompted the dollar to pull back slightly from a high of 108.541, yet the DXY retained a strong bullish bias into the week’s end.

Treasury Yields Reinforce Dollar Strength

Treasury yields mirrored the Fed’s hawkish tone. The 10-year yield climbed to 4.59% before settling at 4.53%, while the 2-year yield ended the week at 4.32%. Markets now reflect less than a 10% probability of a January rate cut, reinforcing the dollar’s appeal. Traders recalibrated for fewer near-term adjustments, keeping the greenback well-supported.

Global Currencies Under Pressure

Dollar strength pressured major currencies. The euro dipped to $1.03425 before rebounding to $1.043, while sterling recovered from a low of $1.2475 to close at $1.2564. The yen, however, fared worse, plunging to a five-month low of 157.93 before stabilizing at 156.30. The Bank of Japan’s decision to hold rates steady disappointed those betting on a policy shift, exacerbating the yen’s weakness.

Gold Faces Headwinds

Gold prices mirrored currency market reactions, dropping to a one-month low before recovering to settle at $2,623.61, down $25.07 or -0.95% for the week. Analysts point to stronger yields and dollar performance as persistent headwinds. Key support is projected between $2,500 and $2,600, with upside limited unless economic uncertainty resurfaces.

Weekly Outlook

The U.S. Dollar Index remains primed for further gains, holding support at 107.178 and 105.420, with initial resistance at 108.972. A decisive break above this level could drive the index toward 114.778, a key long-term target. Although lighter trading is expected in the upcoming holiday week, Powell’s cautious stance and resilient U.S. economic performance should sustain the bullish trend.

Traders should remain alert for volatility from geopolitical events and thin holiday liquidity, with potential swings in global currency pairs and commodities.

More Information in our Economic Calendar.