US Dollar Forecast: DXY Rally Intact as Yields Climb and Gold Struggles

U.S. Dollar Eases; Is the Rally Losing Steam?

The U.S. Dollar Index (DXY) dipped slightly on Thursday after a sharp surge in the previous session driven by the Federal Reserve’s hawkish policy update. Despite the day’s minor pullback, the index remains well-supported by technical levels, with expectations for further strength in the coming sessions.

At 15:48 GMT, the U.S. Dollar Index (DXY) is trading 108.213, up 0.011 or +0.01%.

How Is the Fed Shaping the Market?

The Federal Reserve’s announcement on Wednesday delivered a jolt to global markets. By reducing the expected pace of rate cuts in 2025 to 50 basis points—half the earlier forecast—the central bank reaffirmed its commitment to fighting inflation. This caused the dollar to climb to a two-year high of 108.25, as traders adjusted to the prospect of prolonged higher rates.

Fed Chair Jerome Powell stressed that decisions on rate changes hinge on progress in reducing inflation, which remains well above the 2% target. Markets now see the probability of another rate cut at the Fed’s January meeting falling below 10%, reflecting confidence in the Fed’s restrictive stance.

What’s Next for Treasurys?

U.S. Treasury yields responded strongly to the Fed’s hawkish tone, with the 10-year yield climbing above the key 4.5% threshold to 4.536% on Thursday. This movement followed firm economic data, including a 3.1% GDP growth rate in the third quarter and weekly jobless claims of 220,000—both exceeding expectations.

The 2-year Treasury yield slipped slightly to 4.321%, but the robust performance of long-term yields suggests that investors see limited room for additional near-term rate cuts by the Fed.

How Are Forex Markets Reacting?

Forex markets were volatile, with global currencies initially retreating before stabilizing on Thursday. The euro recovered 0.65% to $1.0418 after a sharp 1.34% decline the previous day. The Canadian dollar touched a four-year low, while the South Korean won reached a 15-year low against the dollar.

The Japanese yen stood out as the weakest performer, dropping to 157.28 per dollar—its lowest since July—after the Bank of Japan kept interest rates unchanged. BOJ Governor Kazuo Ueda indicated the need for more data before considering a policy shift, disappointing traders expecting a hawkish pivot.

Will Gold Recover Further?

Gold prices rebounded more than 1% on Thursday to $2,594.39 per ounce after touching a one-month low earlier in the session. Investors found support in the Fed’s measured approach to future rate cuts, which aligns with recent trends in futures markets.

Safe-haven demand also contributed to gold’s recovery, especially as concerns over inflation and geopolitical risks persist. However, analysts suggest that gold may face additional headwinds in the medium term, as higher yields and a strong dollar weigh on sentiment.

Market Outlook

The U.S. Dollar Index is expected to remain strong, with support at 106.698 and 105.485 and resistance near 109.534. Should the Fed’s hawkish policy stance persist and economic data remain solid, the DXY could test 110.992 in the near term. Pressure on global currencies is likely to continue, with limited opportunities for significant rebounds. Gold, while rebounding, may see further consolidation in the short term.

More Information in our Economic Calendar.