US Dollar Forecast: DXY Slides as Euro Gains on Inflation Forecast

U.S. Dollar Index Struggles as Euro Surges to Four-Month High

The U.S. Dollar Index (DXY) weakened late Thursday, stabilizing after testing a key short-term Fibonacci level at 103.984. A break below this level could open the door to further selling, with the next key support at 103.373. Beyond that, downside targets widen toward the 100.157 – 99.482 zone.

The index remains under pressure, trading below its 200-day moving average at 105.00, which now acts as resistance alongside a significant 50% retracement level at 105.167.

Euro Strength Weighs on the Dollar

The euro surged to a four-month high of 1.0854, rising 0.5% on the day, following the European Central Bank’s (ECB) decision to cut rates for the sixth time in nine months. However, the ECB also revised its inflation forecast higher to 2.3%, signaling that rate hikes may remain on the table if inflation pressures persist.

Germany’s aggressive €500 billion ($540.90 billion) spending plan, which includes major infrastructure and defense investments, adds to inflation concerns. A sharp rise in eurozone inflation expectations, from 2.05% to 2.24% within a week, has fueled speculation that the ECB could slow future rate cuts. This shift supported the euro, putting further pressure on the U.S. dollar.

U.S. Trade Policy Adds to Dollar Weakness

The dollar’s decline has been exacerbated by ongoing trade tensions under the Trump administration. New tariffs on Canada, Mexico, and China, combined with uncertainty around auto import levies, have heightened fears of prolonged trade disputes. While the administration granted a one-month reprieve on auto tariffs for Canada and Mexico, investors remain concerned about the broader economic impact.

Canadian Prime Minister Justin Trudeau stated that Canada expects continued trade tensions with the U.S., reinforcing bearish sentiment on the greenback. The dollar fell 0.5% against the Canadian dollar to C$1.4272.

Market Forecast: More Downside Risk for DXY

The dollar index remains on a four-day losing streak, dropping to 103.88, its lowest in four months. With technical resistance at 105.00 – 105.167, and growing pressure from a strengthening euro, further downside risk remains. If 103.984 fails to hold, the next major support at 103.373 could come into play, with extended losses potentially driving DXY toward 100.157 – 99.482. Traders should closely monitor eurozone inflation data, ECB policy signals, and U.S. trade developments for further market direction.

More Information in our Economic Calendar.